Economics

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Financial Market Access and International Risk Sharing
(2009) Araujo, Juliana; Végh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
In the past three decades the stock of assets and liabilities of developing countries measured as a ratio of GDP has tripled. It is commonly believed that an increase in opportunities for diversifying risk allows more consumption smoothing. However, the data show that volatility of consumption in developing countries has persisted at high levels, showing only an average 11 percent decrease from the 60's to the 90's. This paper aims to explain this phenomenon by investigating to what extent domestic financial frictions related to heterogeneous home financial market access can help resolve the quantitative discrepancy between the change in volatility of consumption in the data and that predicted by a model economy that allows for higher degrees of financial integration. We show that in an endowment economy, if only 40 percent of the population has access to financial markets, full access to insuring country risk in international markets would reduce consumption volatility by 24 percent. In a world in which all agents have equal access to financial markets, the predicted impact of integration with world markets would be a much higher drop of 49 percent. The absence of a forward international market for the nontradable good and the inability of some agents to access a forward market for the tradable good opens a new role for the spot market of tradable and nontradable goods: individuals excluded from financial markets use the goods market to attenuate tradable risk, which is reflected in higher consumption volatility for these agents following international financial integration. In an extended version of the model allowing for production, opening the economy brings even less change in consumption volatility. Later, we investigate whether limited domestic financial market participation can break the theoretical result found by Backus and Smith (1993) that consumption ratios and the real exchange rate are perfectly correlated for pairs of countries. We consider a two-country world inhabited by individuals with heterogeneous access to financial markets in one country and full access in the other. Both countries are endowed with tradable and nontradable goods. We find that consumption ratios for individuals with access to financial markets are perfectly correlated with the real exchange rate across countries but the aggregate consumption ratio and the real exchange rate might not be perfectly correlated across countries.
TO LOHN OR NOT TO LOHN--A PUZZLE IN SUBCONTRACTING ARRANGEMENTS: THEORY AND EVIDENCE
(2009) Andrei, Simona Cristina; Betancourt, Roger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
The dramatic increase in outsourcing has led to a burgeoning theoretical literature that tries to explain the associated organization of production. So far the literature has focused solely on analyzing the determinants of decisions by outsourcing firms, but has ignored the firms to which production is outsourced. This dissertation bridges this gap in the literature by studying outsourcing decisions not from the point of view of the outsourcing firm alone, but as a joint process that actively involves the manufacturer to whom production is outsourced. We focus on a particular form of international outsourcing, also known as the lohn system , in which the outsourcing firm provides the manufacturer with inputs needed to produce and then re-imports the final goods. We use an incomplete contracts framework to develop a theoretical model that shows that the lohn system is more likely to be adopted the lower the manufacturer's ability to find low-cost inputs; the lower the bargaining power of the manufacturer; and the lower the degree of relationship-specificity. In order to test empirically the predictions of the theoretical model we exploit two unique firm-level databases with monthly data on physical production and balance sheet items for a large number of firms in Romania. We use the data sources to construct two data sets, at the firm and firm-product level, respectively. We present firm-level results for cross-sections for the years 2005 and 2006, while at the firm-product-level we provide results for both cross-section and panel data. Our empirical findings support the main predictions of the theoretical model. For instance, measuring the bargaining power of the manufacturer as the ratio of domestic to export sales, we show that the lower this ratio is, the more likely it is that the manufacturer will adopt the lohn system. Similarly, we find that the lower the firm or product specificity, the higher the use of the lohn system. Using firm age as a measure of its ability to obtain the low-cost input provides mixed evidence for our theoretical prediction. Our results are robust to the use of different estimation procedures, measures, and samples.
Product Differentiation in International Trade
(2009) Gervais, Antoine; Limao, Nuno; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This thesis is concerned with the role of product quality in explaining observed price and trade patterns. The first chapter introduces the topic, summarizes the main findings of the dissertation and contrasts them to other results in the literature. The second chapter develops a tractable general equilibrium model that includes quality differentiation among heterogeneous firms. The theory explicitly demonstrates how heterogeneity in a single exogenous parameter, productivity, can produce dispersion in product quality and price. The framework predicts that relatively productive firms will choose to produce high quality varieties. This finding accords well with the observation that the unit value of exported varieties increases with exporter's income, capital- and skill- abundance. The model is used to analyze how international trade policy and quality differentiation interact to shape patterns of production and trade flows. In particular, the model predicts a positive relationship between product quality and export status at the firm level and that trade liberalization decreases the average quality of a country's exports. The third chapter evaluates the importance of vertical product differentiation in explaining price and export status patterns observed in microdata on U.S. manufacturing plants. The main difficulty in exploring the impact of vertical product differentiation is that product quality is not directly observable. The analysis tackles the problem from two angles. First, the chapter develops a novel empirical strategy to obtain a proxy for quality, which is then used to evaluate important conditional correlations. The results show that both quality and productivity are important determinants of price and export status pattern. Second, the simulated method of moments is used to obtain structural estimates of the parameters of the model and to assess the importance of quality differentiation. The estimates suggest that quality differentiation plays an important role in explaining the variation in price, size and export status across U.S. manufacturing plants. The fourth chapter briefly concludes by summarizing the main findings and suggesting avenues for future research. Overall the analysis presented in this dissertation implies that vertical product differentiation, or quality, plays an important role in explaining dispersion in producer output price and export status.
ENDOGENOUS INSTITUTIONAL CHANGE: THE TRANSFORMATION OF THE STATE-LOCAL RELATIONSHIP IN THE UNITED STATES
(2009) Hennessey, Jessica Lynne; Wallis, John J; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This thesis focuses on the changing relationship between state and local governments. I explore state-level constitutional changes in the 19th and early 20th century with respect to the governance and organization of municipalities. The rich heterogeneity across state constitutions gives us an opportunity to understand the underlying political and economic forces at work, using a fiscal federalism and political economy framework. There are parallels between state-level constitutional changes regarding private corporations and the less well understood changes instituted for public corporations such as municipalities. The adoption of municipal general legislation stemmed from similar problems of special interests and political maneuvering under special legislation. In some states, general legislation protected municipalities from unwanted abuse by state-level politics, and provided a uniform structure under which all local governments could operate and easily gain access to the corporate form. However, as in the case of private corporations, the one-size-fits-all rubric of general legislation was often not amenable to all municipalities. Some states implemented a Pareto-improving solution, which is to have general legislation available for those well served by it, and to give municipalities the flexibility to self-select and independently charter themselves. The resolution to grant home rule to municipalities retained the political security afforded by general legislation and provided the freedom of organization to those who needed it most. The thesis is organized as follows. Chapter 2 documents the history of the relationship between states and their municipalities. The chapter also discusses the various problems states had in maintaining the original setup of passing special laws for municipalities. Chapter 3 evaluates the changing economic and political conditions which may influence a state's choice of how to structure the state-municipal relationship. Chapter 4 looks at one institutional change, the adoption of home rule. By using a unique municipal-level dataset, I empirically investigate why certain states may have adopted this institution. Chapter 5 considers another form of local government, the school district. The patterns seen in the state-municipal relationship are mirrored in the state-school district relationship.
Firm Owners and Workers: An Analysis of Immigrants and Ethnic Concentration
(2009) Garcia-Perez, Monica I.; Haltiwanger, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation consists of three chapters examining the important role of firm and coworker characteristics, as well as the use of social networks, in labor markets. The first paper investigates the effect of firm owners and coworkers on hiring patterns and wages. Immigrant-owned firms are more likely to hire immigrant workers. This prevalence is especially strong for Hispanic and Asian workers. We also find that the probability that a new hire is a Hispanic is higher for immigrant firms. On wage differentials, the results illustrate that much of the difference between the log annual wages of immigrants and natives can be explained by immigrants' propensity to work in non-native owned firms, which pay the lowest average wages. Interestingly, though, native workers holding a job in immigrant firms are paid less than immigrant workers. The last section examines the potential mechanisms for these findings. It explores the importance of job referral and use of networks for migrants in labor markets. We consider the theoretical implications of social ties between owners and workers in this context. Firms decide whether to fill their vacancies by posting their offers or by using their current workers' connections. Next, we explore the patterns of immigrant concentration relative to native workers at the establishment level in a sample of metropolitan areas. Immigrants are much more likely to have immigrant coworkers than are natives, and are particularly likely to work with others from the same country of origin, even within local markets. The concentration of immigrants is higher for recent immigrants and interestingly for older immigrants. We find large differences associated with establishment size that cannot be explained solely by statistical aggregation. Exploring the mechanisms that underlie these patterns, we find that proxies for the role of social networks, as well as the importance of language skills in the production process, are important correlates of immigrant concentration in the workplace.
ESSAYS IN EMPIRICAL INDUSTRIAL ORGANIZATION
(2009) Chesnes, Matthew William; Rust, John; Jin, Ginger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Chapter 1: Capacity and Utilization Choice in the US Oil Refining Industry This paper presents a new dynamic model of the operating and investment decisions of US oil refiners. The model enables me to predict how shocks to crude oil prices and refinery shutdowns (e.g., in response to hurricanes) affect the price of gasoline, refinery profits, and overall welfare. There have been no new refineries built in the last 32 years, and although existing refineries have expanded their capacity by almost 13% since 1995, the demand for refinery products has grown even faster. As a result, capacity utilization rates are now near their maximum sustainable levels, and when combined with record high crude oil prices, this creates a volatile environment for energy markets. Shocks to the price of crude oil and even minor disruptions to refining capacity can have a large effect on the downstream prices of refined products. Due to the extraordinary dependence by other industries on petroleum products, this can have a large effect on the US economy as a whole. I use the generalized method of moments to estimate a dynamic model of capacity and utilization choice by oil refiners. Plants make short-run utilization rate choices to maximize their expected discounted profits and may make costly long-term investments in capacity to meet the growing demand and reduce the potential for breaking down. I show that the model fits the data well, in both in-sample and out-of-sample predictive tests, and I use the model to conduct a number of counterfactual experiments. My model predicts that a 20% increase in the price of crude oil is only partially passed on to consumers, resulting in higher gasoline prices, lower profits for the refinery, and a 45% decrease in total welfare. A disruption to refining capacity, such as the one caused by Hurricane Katrina in 2005, raises gasoline prices by almost 16% and has a small negative effect on overall welfare: the higher profits of refineries partially offsets the large reduction in consumer surplus. As the theory predicts, these shocks have a smaller effect on downstream prices when consumer demand is more elastic, resulting in a larger share of total welfare going to the consumer. Chapter 2: Consumer Search for Online Drug Information Consumers are increasingly turning to the internet and using search engines to find information on medicinal drugs. Between 2001 and 2007, the number of adults using the internet as an alternative source of health information doubled. At the same time, online and offline advertising spending by drug companies is growing rapidly. I seek to understand how consumers use search engines to find drug information and how this activity is influenced by direct to consumer advertising. I utilize a database of user click-through data from America Online to analyze the search behavior of consumers seeking drug information online. Compared with other searches, users submitting drug-related queries are more likely to click on more than one result in a search session, and when they do, they click more rapidly through the results and tend to migrate away from dot-com sites and toward those ending in dot-org and dot-net. Offline advertising on a drug serves to increase the frequency and intensity of these searches. Chapter 3: Drug Information via Online Search Engines This paper utilizes a database of organic and sponsored search results from four large search engines to analyze the supply of drug-related information available on the internet. I show that the information varies significantly across search engines, domain extensions, and between organic and sponsored results. Regression results reveal that websites with relatively more promotional content are pushed down in the search results while informational sites (including those ending in dot-gov and dot-org) are more likely to appear on page one of the results.
Essays in Health Economics
(2009) Hayford, Tamara Beth; Duggan, Mark; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Health care expenditures have risen dramatically in the last several decades. Various agents have responded by reforming their practices in an effort to protect their budgets. My dissertation studies the implications of two of these changes on both quality and expenditure dimensions. The first chapter introduces and briefly discusses these topics. The second chapter discusses the implications of hospital mergers. A large body of research has examined their financial consequences, while little has analyzed the effect on patient health and experiences. This chapter aims to fill this gap, utilizing 17 years of hospital discharge data to study the impact of 40 California hospital mergers on changes in treatment choices and health outcomes. I use an empirical strategy that is based on geography of residence to enable a market level analysis. My findings indicate that hospital mergers result in increased utilization of intensive treatments for heart disease, such as bypass surgery and angioplasty. This result could be driven by increased access to intensive procedures as well as a change in hospital treatment practices. I also find evidence of a small increase in inpatient mortality which could be driven by an increase in average travel time to the nearest facility offering cardiac services. In chapter three, co-authored with Mark Duggan, we analyze the implications of a widespread Medicaid reform: contracting out health care treatment of Medicaid recipients to managed care organizations. State governments rapidly shifted Medicaid enrollees into managed care during the 1990s, perhaps partly as a response to increasing Medicaid expenditures. This reform has not previously been studied at the national level. We use state-level aggregate administrative data for the years 1991-2003 in conjunction with a unique data set on mandatory managed care enrollment policies to estimate the average national impact. Results suggest that this policy may have increased the expense of the Medicaid program, particularly for HMO-style insurance plans. We extend our analysis to investigate the impact of these policies on enrollment decisions. Using CPS data, we find mixed responses to mandatory managed care policies, though all changes in take-up were small and did not appear to increase uninsurance rates.
Effects of In-Group Bias in a Gift-Exchange Transaction: A Theory of Employee Ownership and Evidence from a Laboratory Experiment
(2009) Bergstresser, Keith David; Sanders, Seth G.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation presents a behavioral model of employee ownership and an experimental examination of the model. Chapter 1 reviews literature on employee ownership, gift-exchange, social preferences in experimental economics, and in-group bias. The model of employee ownership, presented in Chapter 2, incorporates in-group bias into a gift-exchange framework. Predictions of the model include higher productivity, higher profits, higher wages, and greater worker satisfaction in employee owned firms relative to otherwise identical publicly traded or private firms with no employee ownership. Chapter 3 presents the results of a laboratory experiment designed to test both the assumptions and the predictions of the model described in Chapter 2. In-group bias is found to affect the giving and trusting behavior, but not the reciprocal behavior of the subjects in the experiment.
Valuation Effects and External Adjustment
(2009) Nguyen, Ha Minh; Korinek, Anton; Vegh, Carlos; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
In the past two decades, cross country portfolio holdings of a large variety of assets have risen sharply. This has created an important role for changes in asset prices, or valuation effects". This dissertation examines the role of valuation effects in a country's external adjustment. The dissertation is organized as follows: Chapter 1 is a brief introduction. Chapter 2 presents some facts about the U.S.'s valuation effects from stocks and bonds during 1994-2007. In particular, total valuation effects from stocks and bonds during this period were $1295 billions, offsetting about 22.8% the size of the U.S.'s total current account deficits. Much of the positive, stabilizing effects arose after 2002. Before 2002 the valuation effects were often negative and reinforcing the current account deficits. Chapters 3, 4 and 5 present a two-country dynamic stochastic general equilibrium (DSGE) model to study valuation effects theoretically. Chapter 3 outlines the set up of the model, where output has a transitory and a trend component, both of which are subject to AR(1) shocks. Chapter 4 solves analytically a simplified version of the model that only considers transitory output shocks. It shows that valuation effects are stabilizing in response to transitory shocks. That is, valuation effects move in the opposite directions of the current account, and mitigate the impact of the current account on the NFA position. Chapter 4 also shows analytically that the size of valuation effects relative to the current account is positively related with the level of financial integration, which in turn increases with risk aversion, with output volatility, with output persistence, and decreases with the discount factor and with the cost of investing abroad. For the benchmark calibration, when domestic investors hold about 40% of their financial wealth in foreign equity, valuation effects will completely offset the current account. Chapter 5 solves numerically for the full version of the model, where both transitory and trend output shocks are considered. It shows that valuation effects are not always stabilizing. Following trend shocks on output, valuation effects are amplifying: they move in the same direction as the current account and reinforce the impact of the current account on net foreign assets. The results are illustrated by the external imbalances between the U.S. and other industrialized countries since the 1990s. Chapter 6 concludes.
Civil Liberties, Mobility, and Economic Development
(2009) BenYishay, Ariel; Betancourt, Roger R.; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
To what extent do civil liberties affect economic development? This dissertation addresses this question in two essays. The first chapter (joint with Roger Betancourt) provides a new economic interpretation of civil liberties as rights over a person's most basic human asset: her own self. The importance of these rights to economic development is based on the principle that property rights-defined over a broad set of "property''-are crucial for economic growth. The empirical literature to date shows little support for such claims related to civil liberties, however, with ambiguous evidence on the role of these rights in driving long-run growth. Using newly available data from Freedom House, we find that one of the recently disaggregated categories of civil liberties explains income differences across countries more powerfully and robustly than any other measure of property rights or the rule of law considered. This component, entitled "Personal Autonomy and Individual Rights,'' evaluates the extent of personal choice over issues such as where to work, study, and live, as well as a broader set of property rights and other choices. While the first chapter finds that greater civil liberties can substantially improve long-run economic development, the second chapter identifies a key friction in this relationship. In countries that lack complementary institutions, civil liberties governing individual mobility can complicate credit transactions. By allowing individuals to move to locations where less is known about their prior defaults, mobility freedoms induce opaqueness and can result in credit rationing. I develop an instrumental variable estimation to study these effects, which would otherwise be complicated by omitted variable bias and endogeneity. Using household survey data from Guatemala, I instrument for individual migration with the interaction of violence patterns and individual sensitivities toward that violence. Using this approach, I find that the act of migration within a country actually causes individuals to have significantly less access to credit, primarily because lenders are concerned about these borrowers' opportunistic default.

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