Theses and Dissertations from UMD
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Item ESSAYS ON NEWS AND ASSET PRICES(2010) Sinha, Nitish Ranjan; Kyle, Albert S; Business and Management: Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The first essay examines news and the cross section of returns. Using a sentiment score provided by Thomson Reuters to measure the tone of news articles, this paper examines monthly portfolio returns constructed from information about past news articles. The sentiment score is obtained from the kind of words and phrases that are used in the news article. Positive tone in news articles in the past months predicts positive returns. Similarly, negative tone in the past months predicts negative returns. Past sentiment predicts future returns even for large stocks. The predictive ability of past sentiment dominates the predictive ability of past returns. After controlling for past sentiment, the predictive ability of past returns (in predicting future return) disappears. The findings are robust to multiple specifications. The predictive ability of past sentiment can be used profitably. When applied to the largest decile of stocks, a strategy that takes a long position in stocks with past positive sentiment score and a short position in stocks with past negative sentiment score generates a statistically significant alpha of 34 basis points per month. The resulting portfolio is also positively correlated with a long-short momentum portfolio. Within the same time period, a trading strategy using the sentiment scores from the subset of news articles citing analysts is not profitable. The news items that cite analysts have economically significant contemporaneous returns. The findings suggest that (i) the market underreacts to information contained in news articles, (ii) momentum might be related to underreaction to the sentiment information, and (iii) market participants pay attention to sentiment score information in analyst news. The findings are consistent with a model where one trader has private information and others are trading based on past returns and volume information. The paper also shows that after adjusting for firm size, stocks with abnormally high counts of news articles underperform stocks with normal counts of news. Stocks with abnormally low newscounts also underperform. The second essay examines the relationship between news and trading activity. The theory of trading game invariance of Kyle and Obizhaeva(2009) predicts that for every one percent increase in trading activity, the frequency of news articles should increase two-thirds of one percent. Using news data from 2003 to 2008, we show that the cross-sectional variation in news articles across stocks is related to the trading activity in a manner consistent with the trading game invariance. The relationship is robust to various estimation procedures including models of count data. The relationship is also robust to multiple ways of counting news and excluding various type of firm specific news.Item Dynamic competition with customer recognition and switching costs: theory and application(2010) Grozeva, Vesela Dimitrova; Vincent, Daniel R; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation aims to contribute to our understanding of dynamic interaction in duopoly markets. Chapter 1 motivates the study and offers a brief overview of the results. In Chapter 2 I study the dynamic equilibrium of a market characterized by repeat purchases. Such markets exhibit two common features: customer recognition, which allows firms to price discriminate on the basis of purchase history, and consumer switching costs. Both features have implications for the competitiveness of the market and consumer welfare but are rarely studied together. I employ a dynamic framework to model a market with customer recognition and switching costs. In contrast to earlier studies of dynamic competition with switching costs, these costs are explicitly incorporated in the demand functions. Two sets of market equilibria are characterized depending on the size of the switching cost. For all values of the switching cost, customer recognition gives rise to a bargain-then-ripoff pattern in prices and switching costs amplify the loyalty price premium. When switching costs are low, there is incomplete customer lock-in in steady state, firm profits increase in the magnitude of the switching cost and introductory offers do not fall below cost. When switching costs are high, there is complete customer lock-in in steady state, firm profits are independent of switching costs and introductory prices may fall below cost. Under incomplete lock-in and bilateral poaching, switching costs do not affect the speed of convergence to steady state; under complete customer lock-in and no poaching from either firm, convergence to steady state occurs in just one period. The model also suggests that imperfect customer recognition leads to lower profits relative to both uniform pricing and perfect customer recognition. In Chapter 3 I use the market framework developed in Chapter 2 to examine the perception that imperfect competition hinders information sharing among rivals in games of random matching. In contrast to previous studies of information sharing, I propose a new channel through which competition may deter information sharing. This approach reveals a key role for firm liquidity by showing that information sharing among rivals is more likely to arise in markets populated by more liquid firms. Employing a dynamic duopoly framework, in which competition intensity varies with the degree of product differentiation, consumer switching costs and consumer patience, I show that more intense market competition can weaken the disincentives associated with disclosing information to a rival. I test the model's predictions using firm-level data on the information-sharing practices of agricultural traders in Madagascar. As predicted by the model, traders operating in liquid markets are shown to be more likely to share information about delinquent customers. This result is robust to the use of two alternative measures of liquidity, of which one is credibly exogenous, and two alternative ways of defining market liquidity. Furthermore, traders who report more intense competition in their market are found to be significantly more likely to share information.Item Design of Discrete Auction(2010) Sujarittanonta, Pacharasut; Cramton, Peter; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Efficient Design of an Auction with Discrete Bid Levels This paper studies one of auction design issues: the choice of bid levels. Full efficiency is generally unachievable with a discrete auction. Since there may be more than one bidder who submits the same bid, the auction cannot completely sort bidders by valuation. In effort to maximize efficiency, the social planner tries to choose the partition rule-a rule dictating how type space is partitioned to group bidders who submit the same bid together-to maximize efficiency. With the efficient partition rule, we implement bid levels with sealed-bid and clock auctions. We find that the efficient bid levels in the sealed-bid second-price auction may be non-unique and efficient bid increments in a clock auction with highest-rejected bid may be decreasing. We also show that revealing demand is efficiency-enhancing even in the independent private valuation setting where price discovery is not important. Chapter 2: Pricing Rule in a Clock Auction We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes a bidder to the possibility of losing the auction at a price below the bidder's value. Thus, a fear of losing at profitable prices may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser's regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders' fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction. Chapter 3: Discrete Clock Auctions: An Experimental Study We analyze the implications of different pricing rules in discrete clock auctions. The two most common pricing rules are highest-rejected bid (HRB) and lowest-accepted bid (LAB). Under HRB, the winners pay the lowest price that clears the market; under LAB, the winners pay the highest price that clears the market. Both the HRB and LAB auctions maximize revenues and are fully efficient in our setting. Our experimental results indicate that the LAB auction achieves higher revenues. This also is the case in a version of the clock auction with provisional winners. This revenue result may explain the frequent use of LAB pricing. On the other hand, HRB is successful in eliciting true values of the bidders both theoretically and experimentally.Item Health, Agriculture and Labor Markets in Developing Countries(2010) Kim, Yeon Soo; Cropper, Maureen; Lafortune, Jeanne; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Rural households comprise a large share of the population in developing countries. This dissertation examines how the welfare of these households, whose economic activity mainly relies on agriculture, is affected by weather shocks and health shocks in the context of West Africa and Vietnam. In the second chapter of the dissertation, I use the variation in rainfall within and across years at a detailed geographic level in West Africa to examine how rainfall shocks might affect the well-being of very young children. Variations in rainfall may affect not only income, but also the opportunity cost of time of parents, which may negatively impact child welfare. I find that high long-term rainfall averages for a particular location and month increase the probability of giving birth in the dry season, whereas positive deviations from this long-term mean ("rainfall shocks") have a small but statistically significant negative effect on the probability of giving birth in the rainy season. Further, contrary to what one might expect, rainfall shocks do not appear to improve the survival chances of young children and shocks in the first year of life have an adverse effect on the survival of children that are born in the rainy season. This result may be partly attributable to the finding that rainfall shocks significantly reduce the time mothers breastfeed their children, which could be due to a trade-off with work. Breastfeeding is important for the health of young children since it provides not only essential nutrients but also effective protection against various diseases. In the third chapter, I examine the effect of health shocks on the production decisions of agricultural households in Vietnam. I look at whether malaria illnesses experienced by the household have an effect on their agricultural production decisions. While I am not able to entirely overcome issues with endogeneity that are persistent in this literature, results show that profits are negatively associated with the share of household members experiencing malaria. This result is not explained by the decrease in the total number of labor days the household employed. Rather, households appear to change their crop choice to less labor-intensive, less profitable crops in anticipation of these seasonal health shocks.Item Essays on Optimal Aid and Fiscal Policy in Developing Economies(2010) Banerjee, Ryan Niladri; Mendoza, Enrique G; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Essay I: Which countries receive aid as insurance and why? A theory of optimal aid policy Empirical evidence shows that developing countries with opaque institutions receive procyclical Official Development Aid (ODA) while developing countries with transparent institutions receive acyclical or countercyclical ODA. This paper provides a dynamic equilibrium model of optimal aid policy that quantitatively accounts for this fact. In the model, the donor wants to (a) encourage actions by the aid receiving government that increase output and (b) smooth out economic fluctuations. The transparency of institutions in the country affects the donor's ability to distinguish downturns caused by exogenous shocks, from those caused by government actions. The solution to the donor's mechanism design problem is dependent on the transparency of government actions. If the donor has good information about government actions, aid policy is countercyclical and aid acts as insurance. However, if the donor is unable to infer perfectly the cause of the downturn, aid policy is procyclical to encourage unobservable good actions. The model predicts a similar pattern for ODA commitments for the following year which is supported by the data. For countries with opaque institutions procyclical aid is the result of optimal policies given the information constraints of donors. Essay II: New Evidence on the Relationship Between Aid Cyclicality and Institutions This paper documents a new fact: the correlation between official development assistance (ODA) and GDP is negatively related to the quality of institutions in the receipient country. Differences in institutional indicators that measure corruption, rule of law, government effectiveness and government transparency are particularly important. The results are robust to several modifications. The results hold for both pooled and within regressions specifications and for different sources of institutional quality measures. This fact also reconciles conflicting empirical results about the correlation between ODA and GDP in the literature. For instance, Pallage and Robe (2001) find a positive correlation in two thirds of African economies and half of non-African developing economies, but Rand and Tarp (2002) find no correlation in a different set of developing countries. First, once institutions are accounted for, African economies are not treated differently by donors. Second, the sample in Rand and Tarp (2002) comprises developing economies which have relatively good institutions, therefore, those countries receive acyclical or countercyclical aid. \\ Essay II: Optimal Procyclical Fiscal Policy Without Procyclical Government Spending Procyclical fiscal policy can be caused by either procyclical government expenditure, countercyclical taxes or both. The majority of models which try to explain procyclical fiscal policy as the result of optimal policy have procyclical government expenditures. This paper develops a model which optimally generates procyclical fiscal policy while keeping government expenditures acyclical. Instead, taxes are optimally countercyclical. The model uses endogenous sovereign default to generate an environment where interest rates are lower in booms than in recessions. If household's have insufficient access to financial instruments it is optimal for the government to lower taxes and borrow during booms. This enables impatient households to benefit from the lower interest rates in booms by helping the consumer bring consumption forward.Item Two Essays in Macroeconomics(2010) Wu, Dong; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Castro and Coen-Pirani (2008) document that aggregate skilled hours and employment both became more volatile after the mid-1980s, in contrast to the simultaneous volatility decline of most aggregates, including overall hours and employment and unskilled hours and employment. In chapter 1, I propose that rising efficiency in matching skilled workers to vacancies accounts for this change. The rise of general-purpose information technology made the skills of well-educated workers more transferable across firms and industries, and this increased the suitability of unemployed skilled workers for a broader range of job vacancies. In turn this implies a larger increase in the flow of skilled labor into employment during economic booms. This causes skilled aggregates to be more volatile. I embed a simple search and matching mechanism in a typical dynamic general equilibrium model to demonstrate this idea. The purpose of chapter 2 is to explore the contribution of capital-skill complementarity to short-run employment fluctuations. Given that such complementarity is a leading explanation for long-run changes in the skill premium, it is interesting to check its short-run implications for employment volatility. The numerical results show that complementarity can make skilled employment more volatile than the unskilled, but it can not improve standard DSGE models' implications for overall labor market' volatility.Item THREE ESSAYS IN POLITICAL ECONOMY(2010) Miller, Sebastian Jose; Drazen, Allan; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation explores three different relevant questions in political economy. Chapter 1 is devoted to understanding why populist-outsider candidates get elected, and what conditions may favor/hinder their electability. The results show that countries with a higher income and wealth concentration are more likely to elect populist outsiders than countries where income and wealth are more equally distributed. It is also shown that elections with a runoff also are less likely to bring these populist outsiders into office. Chapter 2 in turn explores the role of the middle class in moderating political outcome in a framework where money and votes play two distinctive roles in the election process. In this chapter, a three-class model of heterogeneous agents is developed in which groups affect policy outcomes through their voting behavior and contributions to political campaigns, and where income inequality can lead to extreme policy outcomes. Increasing the size of the middle class reduces the likelihood of extreme policy outcomes, as does a richer middle class. This result highlights the importance of a large and strong middle class for political stability. Finally Chapter 3 looks at the question of why inequality has remained persistently high in Chile despite its success in reducing poverty and achieving high growth for two decades while having a mostly pro-poor structure of public expenditures. We show that the key factors explaining this persistent inequality have been a low level of fiscal expenditures caused by low tax revenues that have not permitted enough public investment in human capital and R&D.Item Empirical Essays on the Economics of Neonatal Intensive Care(2010) Freedman, Seth Michael; Hellerstein, Judith; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The number of neonatal intensive care units (NICUs) in smaller community hospitals increased greatly during the 1980s and 1990s, attracting deliveries away from hospitals with the most sophisticated NICUs. This pattern of ``deregionalization'' has caused concern because previous studies find higher mortality rates for high-risk infants born in hospitals with less sophisticated NICUs relative to those born in hospitals with the highest care level. In this dissertation, I provide causal estimates of the effect of deregionalization on infant health outcomes and treatment intensity. In Chapter 2, I argue that previous estimates of the relationship between the level of care at a high-risk infant's birth hospital and mortality may be biased by unobserved selection. To estimate a causal relationship, I use an instrumental variable strategy that exploits exogenous variation in distance from a mother's residence to hospitals offering each level of care. My instrumental variable estimates are bounded well below ordinary least squares estimates and are not statistically different from zero. These results suggest that relocating patients to hospitals with the highest level of care prior to delivery may not lead to improved mortality outcomes, because infants currently born in lower level facilities have higher unobserved mortality risk. I also provide suggestive evidence that inter-hospital transfer after birth is one mechanism by which infants born at the lowest levels of care achieve similar outcomes to those born at higher level hospitals. In Chapter 3, I test whether additional neonatal intensive care supply leads to excess neonatal intensive care utilization. I exploit within hospital-month variation in the number of vacant NICU beds in an infant's birth hospital the day prior to birth as a source of exogenous variation in supply. I find that the effect of empty beds on NICU admission is positive but very small for the highest risk infants as measured by very low birth weight. However, it is larger for infants with birth weights above this threshold. These results suggest that additional supply of neonatal intensive care resources can lead to increased utilization of intensive care for infants above the very low birth weight threshold.Item LOSS AVERSION AND THE INTERGENERATIONAL CORRELATION OF INCOME(2010) Malloy, Liam Case; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Recent estimates of the intergenerational correlation of income in the United States are centered around 0.6. Existing empirical work is only able to explain about half of this correlation. The first chapter of this dissertation provides a behavioral explanation that accounts for almost half of the unexplained correlation. Heterogeneous agents in the model are loss averse and must choose their education level after learning their "earning ability" and inheriting a reference level of consumption and bequest from the previous generation. These agents make education choices in part to avoid losses relative to reference consumption in the first and second periods of their lives. Agents with high inherited reference consumption choose high levels of education in order to avoid losses in the second period and are therefore likely to have high income and consumption themselves. Those with very low reference consumption are likely to get more education than those in the middle of the reference consumption distribution, as they are less likely to experience a loss in the first period. I find support for this U-shaped education decision rule using the NLSY97 data set. The dissertation also tries to answer the question of why black and white workers display significant differences in their labor market outcomes. Black workers tend to have less education and earn lower income than their white counterparts at each level of education. The second chapter explores three possibilities (wage discrimination, lower earning ability, and low aspirations) for these gaps within the framework of a model with loss aversion and inherited reference consumption. When people have loss-averse preferences, low aspirations lead to lower levels of chosen education. Loss aversion and low aspirations can lead to education outcomes similar to those caused by outright discrimination or lower earnings ability. When combined with wage discrimination the model can also help explain the larger poverty trap and lower affluence net in black families as opposed to white families. Simulation results compare favorably to intergenerational quintile transition rates in the literature. The model takes many generations to reach educational equality after a period of wage discrimination is ended.Item THE IMPACT OF HEALTH INSURANCE ON CANCER PREVENTION: EX ANTE AND EX POST MORAL HAZARDS(2010) Tang, Li; Jin, Zhe; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The classic model of moral hazard suggests that health insurance may reduce preventive care because the insurer will pay for part of the treatment in case of disease. However, if health insurance covers preventive care as well, the reduced cost of preventive care will encourage the insured to consume more preventive care. These two countervailing effects are referred to as ex ante and ex post moral hazards (Zweifel & Manning 2000). Most studies do not distinguish the two effects, leading to a potentially wrong characterization of moral hazard. Using Medicare coverage as an example, this thesis identifies ex ante and ex post moral hazard effects of health insurance on cancer prevention. As we know, Medicare eligibility rules increase health insurance coverage at age 65. However, some preventive screenings were not covered in Medicare until recently. The different timing of Medicare eligibility and Medicare expansion of preventive care allows me to use a difference-in-differences framework to separate ex ante and ex post moral hazards. I focus on female uptake of breast cancer screening and male uptake of prostate cancer screening, using the Medical Expenditure Panel Survey (MEPS) and the National Health Interview Survey (NHIS). In both datasets, I find evidence in support of ex ante and ex post moral hazards. No evidence shows that people try to delay screening until it has been covered by Medicare. Moreover, the level of prevention and responsiveness to insurance changes vary with demographics, with larger effects among whites and the better-educated. Then I take a second look at the moral hazard problem in the health insurance market using the Health and Retirement Study (HRS). Compared with MEPS or NHIS, the panel nature of HRS allows me to control for individual fixed effects and therefore provides a more stringent test. The major findings on breast cancer screening are consistent. I find strong ex ante and ex post moral hazard effects in it, and individual reactions to Medicare enrollment and Medicare's preventive care coverage vary by factors such as race and income. However, moral hazards on prostate cancer screening is not found, mainly due to data limitation.