Economics

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Uniform Inference in Panel Autoregression
(MDPI, 2019-11-26) Chao, John C.; Phillips, Peter C. B.
This paper considers estimation and inference concerning the autoregressive coefficient (𝜌) in a panel autoregression for which the degree of persistence in the time dimension is unknown. Our main objective is to construct confidence intervals for 𝜌 that are asymptotically valid, having asymptotic coverage probability at least that of the nominal level uniformly over the parameter space. The starting point for our confidence procedure is the estimating equation of the Anderson–Hsiao (AH) IV procedure. It is well known that the AH IV estimation suffers from weak instrumentation when 𝜌 is near unity. But it is not so well known that AH IV estimation is still consistent when 𝜌=1. In fact, the AH estimating equation is very well-centered and is an unbiased estimating equation in the sense of Durbin (1960), a feature that is especially useful in confidence interval construction. We show that a properly normalized statistic based on the AH estimating equation, which we call the 𝕄 statistic, is uniformly convergent and can be inverted to obtain asymptotically valid interval estimates. To further improve the informativeness of our confidence procedure in the unit root and near unit root regions and to alleviate the problem that the AH procedure has greater variation in these regions, we use information from unit root pretesting to select among alternative confidence intervals. Two sequential tests are used to assess how close 𝜌 is to unity, and different intervals are applied depending on whether the test results indicate 𝜌 to be near or far away from unity. When 𝜌 is relatively close to unity, our procedure activates intervals whose width shrinks to zero at a faster rate than that of the confidence interval based on the 𝕄 statistic. Only when both of our unit root tests reject the null hypothesis does our procedure turn to the 𝕄 statistic interval, whose width has the optimal 𝑁−1/2𝑇−1/2 rate of shrinkage when the underlying process is stable. Our asymptotic analysis shows this pretest-based confidence procedure to have coverage probability that is at least the nominal level in large samples uniformly over the parameter space. Simulations confirm that the proposed interval estimation methods perform well in finite samples and are easy to implement in practice. A supplement to the paper provides an extensive set of new results on the asymptotic behavior of panel IV estimators in weak instrument settings.
EMPIRICAL ESSAYS ON FINANCIAL ECONOMICS
(2019) Wang, Jun; Kyle, Albert; Shea, John; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Using institutional investors’ holdings data from Thomson Reuters’ 13F filings, the first chapter studies and tests the market microstructure invariance hypothesis proposed by Kyle and Obizhaeva (2016a), and in particular its implied −2/3 law on the relationship between investors’ bets and stock trading activity, defined by the product of price, volume, and volatility. With the identifying assumption that institutional asset managers’ holdings are proportional to their bets, our empirical results support the −2/3 law implied by the invariance hypothesis. The −2/3 law is robust to a variety of estimation strategies and robustness checks. Then we study whether distributions of bets are invariant and log-normal. Data strongly support the hypothesis before March 1998, and the weak version of the invariance hypothesis (the mean of distributions of bets is invariant) continues to hold in the remaining periods. The strong version failing to hold after March 1998 may be due to adjustment costs and very tiny positions. The second chapter studies the role of convertible debt on investment. Convertible debt in the capital structure facilitates investment for a firm (especially for a firm with high leverage) since it reduces the firm's interest payments and leverage upon conversion, making it easier for the firm to issue new financial instruments. However, the same property may bring an agency issue: The potential of conversion into equity dilutes existing shareholders' profits, decreasing the firm's motivation to do investment. We hypothesize that the agency issue brought by convertible debt is minimal in very competitive markets since the external pressure is high, so that the facilitation role may outweigh the dilution role, suggesting a positive effect on investment, and that the agency issue brought by convertible debt may outweigh or just offset the facilitation role in less competitive markets since the external pressure is not high, suggesting a negative or insignificant effect on investment. Using data from Compustat, we find that convertible debt has a positive and quadratic effect on investment rates in competitive industries (industries with very low HHI), a negative and quadratic effect on investment rates in oligopoly industries (intermediate HHI), and an insignificant effect on investment rates in highly monopolistic industries (high HHI). These effects are robust to including different control variables. We also suspect the interaction of warrants and competition has similar effects. These results may have implications on the announcement effects or long term effects of convertible debt issuance under different industry structures.
Essays on Econometrics and Macro-Finance
(2019) Mao, Zi-Ying; Heston, Steven; Kuersteiner, Guido; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation consists of three chapters on empirical macro-finance and the associated econometric methods. In the first chapter, I develop a semiparametric single-index method for estimating multivariate jump-diffusion processes to model federal funds futures. I find that high-frequency changes in federal funds futures around FOMC announcements, which are the predominant measure of monetary policy shocks in the asset pricing and macroeconomic literature, are strongly forecastable by the estimated models, suggesting that they are not truly exogeneous. In contrast, the unexpected changes in federal funds futures on FOMC announcement days constructed from the semiparametric method are unforecastable by construction, and are strongly correlated with, but not the same as such high-frequency changes around FOMC announcements, suggesting that they are a better measure of monetary shocks. In the second chapter, I study the predictability of bond yields. I find that federal funds futures, a proxy of monetary shocks, exhibit strong forecasting power on bond yields conditional on information contained in the cross section of the yield curve. Such additional return-forecasting information is effectively summarized by a single factor, and is not captured by unspanned macro factors. By focusing on the return-forecastability of trading strategies that take opposite positions at two different tenors by equal amount and unwind these positions one-day later, I bypass common econometric issues arising from the overlapping nature of bond excess returns. In the third chapter, I study macro factors in the risk premia of G10 currencies. Motivated by the finding from a structural model with minimalistic assumptions that the predictability of currency risk premium arises from the differences in the market prices of risks between the home and foreign countries, I tackle this problem by identifying return-forecasting macro factors for the G10 currencies. Based on dynamic factor analysis on a large panel of macro variables, it is found that common macro factors possess strong forecasting power on the risk premia of G10 currencies, especially at longer maturities. The single most important factor loads heavily on activities in the US housing market and bond yields, which exhibits uniform and nonlinear forecasting power across all currencies and at a variety of maturities. The strong in-sample forecasting power preserves out-of-sample.
Finance and Productivity
(2019) Sever, Can; Kalemli-Ozcan, Sebnem; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
Financial crises are associated with large and persistent output losses, pointing to productivity losses. A potential channel for this phenomenon is the negative impact of disruptions in financial markets on innovative activity, since innovation is the key driver of productivity and economic growth. Throughout three chapters of my dissertation, I provide evidence for this channel. Using data from advanced, emerging market and European economies, following different financial crisis episodes, I show that financial crises lead to a persistent decline, not only in the economic output, but also in innovation. The findings in this dissertation have implciations for macroeconomic policies such as monetary and fiscal policies, structrucal reforms, crisis prevention policies and policies that can shelter productive investment projects from financial frictions.
ESSAYS ON TARGETED PROGRAMS IN EDUCATION
(2019) Witzen, Brian Heath; Turner, Lesley J; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation examines three examples of education policy that affect students' decision-making at three different stages of the academic career. In the first chapter, I examine how grant aid can affect the re-enrollment and graduation rates of bachelor's degree-seeking students. I use administrative data from the State of Maryland to study the state's largest need-based grant aid program using a regression discontinuity design. I find positive effects of grant receipt on re-enrollment beginning in the second year and a 10\% increase in the rate of persistence to the fourth year, with similar-sized, but more imprecise effects on graduation within 5 years of entry. In the second chapter, I study State Loan Repayment Programs which pay down a physician's medical school debt in exchange for a period of service in a health care provider shortage area. I gather data from individual states on the amounts that their programs offer over time and use changes in designations of health care provider shortage areas to implement a generalized differences-in-differences strategy. I find no overall effect of the programs on the physician-to-population ratio of an area eligible for the program, though I do find evidence of a positive effect on the physician-to-population ratio when I focus on the age group where physicians are most likely to be recent medical school graduates. In the third chapter, I examine the effect of high school Career and Technical Education coursework completion on postsecondary enrollment, degree completion, and early career earnings. I utilize two estimation strategies. The first is a propensity score matching approach and the second is an instrumental variables approach based on the distance between a student's high school and a CTE Center that offers the coursework. The two strategies generally find that CTE is associated with a substitution from four-year programs to two-year programs, and positive effects on early career earnings.
Essays on Information Manipulation and Optimal Decision Making
(2019) Saraiva, Gustavo Quindere; Ausubel, Lawrence; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation studies a variety of topics related to information manipulation, such as the manipulation of reviews in online rating platforms, or the act of misreporting one's preferences in matching mechanisms; and how those manipulations affect the overall allocation in the economy. Chapter 1 analyses the incentives that drive some sellers to fake reviews in online rating platforms, such as Amazon and Yelp. Among other things, I find that sellers' optimal investment in fake reviews is not a monotone function of their reputation. More precisely, sellers that currently possess a very good or very bad history of past reviews have less incentives to solicit fake reviews praising their own products, the intuition being that, for sellers with very bad reputation, it is too costly to pretend that they are high quality sellers; while sellers that have already accumulated a very good reputation do not need to spend much effort in convincing buyers that they are high quality sellers. Moreover, in order to maximize the impact from each fake review, sellers tend to concentrate review manipulation at the initial stages after they have entered the market. Chapter 2 develops a theoretical model aimed at explaining the observed polarization on agents' beliefs regarding topics that have objective truths (e.g., such as whether or not global warming is a hoax). The main premises surrounding the model are that rational agents seek to learn the truth about a certain state of the world, but the acquisition of information is costly, and the available information channels are biased and imprecise. The paper vies to understand how the level of bias from those channels affect opinion polarization overall. Chapter 3 analyses agents' incentives to misreport their preferences or vacancies in large stable matches. I find that, under certain assumptions, those incentives vanish for sufficiently large markets, suggesting that stable matching mechanisms are effectively strategy-proof for sufficiently thick markets.
THE ROLE OF INFORMATION IN PRIVATE VALUE AUCTIONS
(2019) Pivovarova, Svetlana; Sweting, Andrew; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation studies the role that the information available to the participants of private value procurement auctions prior to the auction has on the equilibrium auction outcomes. Chapters 1 and 2 present two different models in which the private type of one of the participants is persistent over time and can be informative to her competitors. Chapter 3 looks at the effects of a policy change making the information about upcoming procurement auctions more easily available has on the entry of different types of firms in the auctions. In Chapter 1 I build and estimate a model of repeated asymmetric first price auction in which one of the bidders has a persistent private type, all bidders are backward looking, and all bids are made public after the auction. In particular, I show that the standard model without a binding reserve price misestimates expected procurement costs by 2-14% compared to my model, and withholding past bid information from auction participants can reduce expected procurement costs by up to 11%. These results are relevant for the estimation of both US highway procurement auctions since all of the states' Departments of Transportation publish full auction results online. In Chapter 2 I look at a theoretical model of repeated asymmetric first price auction in which all bids are made public between the auctions, one of the bidders has a persistent private type and is forward-looking. I show that a strictly monotonic equilibrium would not exist in this game, and provide an example of a partially pooling equilibrium in which the bidder with persistent type forgoes profits in the earlier period to withhold the information from her competitors in future periods. Chapter 3 studies the effect that the changes in public procurement rules in Russia had on participation and bidding in regional gasoline procurement auctions. In particular, I look at the difference in changes of entry and bidding patterns for large and small firms after the information about upcoming auctions became more easily available in Jan 2011. I show that the larger firms who have stations both outside and inside of the studied region enter more auctions and bid more aggressively, while local firms who only have stations inside the region do not change entry patterns and bid less aggressively. I associate these changes to the differential changes in entry costs for the different types of firms and confirm this intuition by comparing the structural estimates of entry costs between firm types and time periods.
Essays on the Economics of Skills
(2019) Saltiel, Fernando Andres; Urzua, Sergio; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
In this dissertation, I examine the importance of specific components of the skill vector in affecting outcomes across various settings. In particular, I first consider the importance of non-cognitive skills in higher education in the United States, both in explaining academic undermatch, but also showing their importance towards successful degree completion. In the Chilean context, I consider how early-life math skills affect the likelihood of reaching the top of the income distribution, partly through leading to employment in higher-quality firms. The last chapter of my dissertation presents a discrete choice model of college majors, in which I consider how non-cognitive skills contribute to the gender gap in STEM majors in the United States. In particular, I document the importance of mathematical self-efficacy as an important driver of the gender gap in STEM. In Chapter 2, I analyze the importance of non-cognitive skills in the context of higher education. Using longitudinal data for the United States, I first find that students with higher non-cognitive skills are more likely to enroll in higher-quality four-year colleges. Furthermore, students who have been previously characterized as "under-matched" in higher education have significantly lower non-cognitive skills than students with equivalent test scores. While enrollment is the first step towards higher education completion, a burgeoning literature has documented falling completion rates among enrollees. In this context, I find that for both two-year enrollees as well as those in four-year colleges of varying qualities, non-cognitive skills are strong predictors of subsequent college completion. Chapter 3, written in collaboration with Sergio Urzua, estimates the returns to skills in the labor market by taking advantage of three administrative data sources. We first test for non-linearities in these returns and find that the returns to mathematical skills are highly non-linear, with math skill 'superstars' far outearning other high math scorers. High math-skilled workers not only complete more years of education, but graduate from higher quality universities and earn higher-paying degrees. We further examine the role of firms as a mediator of the returns to skills, a dimension not previously explored in the literature. We find that high-skilled workers match to high-paying firms immediately upon labor market entry. We conduct a decomposition to examine the separate contribution of education and firms in mediating the returns to skills, and find that worker-firm matching explains almost half of the estimated returns. Chapter 4 studies the relationship between pre-college skills and the gender gap in STEM majors. I expand upon the analysis in the first two chapters, by introducing structure to students' human capital investment decisions using a discrete choice model of college major choices. I implement the model using longitudinal data for the United States and consider students' initial and final major choices in a context where college students sort into majors based on observed characteristics and unobserved ability. More specifically, I distinguish observed test scores from latent ability. I find that math test scores significantly overstate gender gaps in math problem solving ability. Math problem solving ability strongly predicts STEM enrollment and completion for men and women. I further explore the importance of math self-efficacy, which captures students' beliefs about their ability to perform math-related tasks. Math self-efficacy raises both men's and women's probability of enrolling in a STEM major. Math self-efficacy also plays a critical role in explaining decisions to drop out of STEM majors for women, but not for men. The correlation between the two math ability components is higher for men than for women, indicating a relative shortfall of high-achieving women who are confident in their math ability. Lastly, I estimate the returns to STEM enrollment and completion and find large returns for high math ability women. These findings suggest that well-focused math self-efficacy interventions could boost women's STEM participation and graduation rates. Further, given the high returns to a STEM major for high math ability women, such interventions also could improve women's labor market outcomes.
Essays on Auction Theory and Application
(2019) Tu, Shunjie; Vincent, Daniel; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
This dissertation contributes to auction theory with application of the theory to the analysis of some real-life problem. In Chapter 1, I study the problem of competition between contest designers where they offer differentiated prizes to a group of contestants with some minimal effort requirements. The equilibrium among contestants is either a separating equilibrium, where strong contestants participating in high-prize contest and weak contestants in low-prize contest, or a mixing equilibrium, where strong players participate in high-prize contest with probability 1, middle-type players randomize between the two contests, and weak players go to low-prize contest with certainty. I then solve an equilibrium of contest designers where one designer's choice of minimal effort level is assumed to be non-strategic. Finally, I provide conditions such that the assumed non-strategic choice of minimal effort level is optimal and thus characterize at least part of the equilibrium set, which expands the knowledge on competing auctions. In Chapter 2, I apply auction theory to analyze the eﬀect of a merger on ﬁrms’ research and development (R&D) investment. There is a substantial literature on the eﬀects of mergers on product prices, but the eﬀects of mergers on other outcomes, such as R&D investment spending, are less studied. I develop a model for evaluating the likely eﬀects of a merger (or joint research venture) on the R&D eﬀorts of competing ﬁrms. The R&D process is modeled as an all-pay contest (auction) among ﬁrms, with the payoﬀ from investment going to the ﬁrm that invests the largest amount. I provide an explicit characterization of the equilibrium in a multi-player asymmetric all-pay contest model. The equilibrium solution then is applied through simulation to calibrate the eﬀects of mergers on ﬁrms’ R&D eﬀorts and eﬃciency as well as on social welfare. I ﬁnd that each ﬁrm is expected to exert more eﬀorts after a merger, but if there are only few ﬁrms premerger, a merger reduces total R&D eﬀort. A merger may also cause ineﬃciency, but the loss in eﬃciency is low. My results also show that net surplus increases after a merger if the number of ﬁrms is small. In Chapter 3, I study a problem of sequential auctions and extend the standard model of sequential second-price auctions to a dynamic game with an inﬁnite horizon with one new buyer entering the auction every period. I ﬁrst derive properties of the symmetric and stationary equilibrium, where buyers bid according to their private valuation less a pivotal continuation value, and I also show that the price path in such equilibrium is weakly decreasing. Imposing preconsistent beliefs, I give the conditions under which a stationary equilibrium exists.
Essays in Centralized Market Allocaitons
(2019) Velez Ferro, Santiago; Ozbay, Erkut; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)
A long-standing policy concern in many countries is the diﬃculty of ﬁlling medical positions in rural areas. In Colombia, the Ministry of Health requires newly graduated health professionals to work in a rural or marginalized urban area for a year in order to receive professional certiﬁcation. The decentralized mechanism used until 2013 to allocate graduates to slots was one that health professionals could manipulate to avoid an assignment. In 2014, a single-oﬀer centralized mechanism that cannot be manipulated to avoid an assignment, based on Gale and Shapley’s deferred acceptance algorithm, was adopted. Following a revealed preference approach, I estimate health professionals’ hospital preferences using the 2014 data. Using these estimates and the fact that under the decentralized mechanism health professionals were able to avoid positions that fall below their acceptance threshold, I obtain the average marginal utility a health professional would require to accept a position by simulating the outcome had the decentralized mechanism still been in use. Then, I simulate the outcome of the centralized mechanism in the absence of the requirement that students accept the assignment determined by the mechanism. I ﬁnd that, given the choice, about 30% of physicians would be left unassigned, im plying that it is important for the policy’s success that assignments be mandatory. I review many algorithms that have been discussed in the literature and ﬁnd some that result in signiﬁcant welfare gains. Finally, I show that, in this setting, there is no evidence that manipulable mechanisms can yield a higher welfare gains.

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