2006–2007

Bureaucratic Incentives and Corruption in India 

Marianne Bertrand, Chris P. Dialynas Professor of Economics

Summary: Despite their importance for implementing policy and regulations that affect businesses and citizens, bureaucrats and the incentives they face for performance are seldom studied. Marianne Bertrand, Robin Burgess and Arunish Chawla are studying the backgrounds and careers of officers of the Indian Administrative Service (IAS) in India to better understand the factors which affect their performance. IAS officers carry out a number of important activities in Indian states; these include revenue collection, maintenance of law and order and implementation of rural development programs. Bertrand, Burgess and Chawla are focusing on two areas: (1) how politics affects the placement, tenure and effectiveness of IAS officers and (2) understanding how bureaucrats’ characteristics affect their performance; this includes analyzing the market and institutional factors that affect the allocation of talent in the bureaucracy. 

Small Firms in Columbia

Hoyt Bleakley, Associate Professor of Economics

Summary: Small and medium-size businesses are regarded by many as an engine of growth and innovation. But a common lament is that these firms face considerable obstacles to establishing operations in developing countries such as Colombia. Hoyt Bleakley is analyzing firm behavior with a little known firm-level database from Colombia, using an econometric methodology known as the regression-discontinuity design. Bleakley’s research will (1) consider the effect of additional collateral on financing and investment choices, (2) measure how the response to fluctuations is affected by the companies' ability to access capital markets and (3) estimate the degree of substitution between capital and labor.

Creation and Destruction of US Products

Christian Broda, Assistant Professor of Economics

Summary: While there is a lengthy literature on job creation and destruction, there has been little work studying the Schumpeterian forces underlying product turnover. Is there more creation in booms than in recessions? Is product destruction countercyclical? In what type of products does creation occur? Is creation within brands or across brands? What is the impact of this turnover on the calculation of prices?  In their research, Christian Broda and coauthor David Weinstein describe the patterns of product creation and destruction in the US market over the last 9 years. They will answer these questions with a unique scanner database and measure the impact that product turnover has in the measurement of prices. 

The Impact of Chinese Growth on the US and World Economy

Christian Broda, Assistant Professor of Economics
John Romalis, Associate Professor of Economics

Summary: The last 25 years of Chinese expansion in world markets provides a unique experience to examine how well existing trade theories explain the patterns of trade and production that have emerged around the world since the rise of China. By looking at highly disaggregate trade data of US imports Christian Broda and John Romalis show that standard trade models have a hard time explaining the evolution of Chinese trade, but that an adaptation of the standard Hecksher-Ohin (HO) model provides an accurate description of observed trade flows. Specifically, Broda and Romalis extend the traditional HO model by adding a quality decision into the model of international trade previously developed by Romalis. The model can potentially explain why countries such as China with relatively abundant and cheap unskilled labor might use a lot of that labor to produce low-quality goods. They then estimate the parameters of the model to see what it suggests about the likely impact of Chinese growth on global supply and demand for goods, and ultimately for the welfare of the rest of the world. 

Impact of Migration on Family Dynamics

Patricia Cortes, Assistant Professor of Economics

Summary: The last two decades have witnessed an increased “feminization” of international migration and the Philippines is no exception. Whereas in the 1970s women formed about 15 percent of the migrant labor force, in 2003, 73% of new hires of Filipino migrant workers were female. The status of female migrants as temporary workers does not allow them to move overseas with their families, therefore, mothers and children suffer from family separation and children left behind generally grow up under serious emotional strain. Patricia Cortes’ research studies the following question: Does growing up without a mother have an effect on a child’s education that that the remittances paid by the mother do not overcome?

While much of the current discussion on this subject has been on anecdotal and survey evidence, Cortes’ study is attempting to uncover precise estimates of the true impact of having a migrant mother on the wellbeing of her children, therefore, providing policy makers with a more complete evaluation of the phenomenon and providing the data to answer related questions.

The Life Cycle of Going Public

Steve J. Davis, William H. Abbott Professor of International Business and Economics

Summary: There are more than five million privately held firms with employees in the United States, which account for about two-thirds of private sector employment. Most remain private in their life cycle, but several hundred per year make the transition to publicly traded status and a handful eventually become giant multinational corporations. The transformation from privately held to publicly traded status is a major phenomenon. Steve Davis is pursuing several research projects designed to study the dynamics of privately held firms. The projects are a combination of new data development and investigations of basic questions about the performance and role of privately held businesses. Some areas of focus include: (1) studying the evolution of firms before and after an initial public offering (IPO); (2) comparing the growth dynamics of newly public firms and those soon to be public with privately held firms and mature public firms; (3) investigating how growth dynamics of newly public firms around their IPO dates vary with firm age, pre-IPO funding sources, product type and industry-level measures of capital intensity and workforce skill; and (4) focusing on the relationship between employer and nonemployer businesses. Davis intends to quantify how new and young businesses fit into the overall industry-level productivity distribution and plan to relate their empirical results to various theories of business learning and life-cycle dynamics, market selection and the sources of industry-level productivity growth. 

Cross-country Impact of Differences in Media Regulation

Matthew Gentzkow, Professor of Economics
Jesse Shapiro

Summary: Gentzkow and Shapiro are studying the impact of cross-country differences in mass media regulation and ownership structure. They have developed a new methodology that exploits searchable databases of news content to estimate political slant of a large number of US newspapers. They will explore the use of this methodology to measure political content in non-US media outlets, including outlets in languages other than English. They will construct measures for a panel of countries and use them to study questions such as: (i) public vs. private ownership; (ii) government limits on ownership consolidation; (iii) limits on press/journalistic freedom; (iv) the degree of competitiveness in the news market overall.

Technology Adoption in Europe

Austan D. Goolsbee, Robert P. Gwinn Professor of Economics

Summary: Austan D. Goolsbee is examining the economic fundamentals of taxes and electronic commerce in the European Union (EU) using a major new source of empirical data on consumers throughout Europe. At the heart of the disputes over economic affairs in Europe and between Europe and the U.S. are questions relating to how influential taxes are on people’s behavior. Yet, there has been, essentially, no academic work trying to figure out the answers to these questions. With this research project, Goolsbee is attempting to fill this gap. His research includes: (i) examining how much VAT tax rates in Europe affect e-commerce for different types of goods and what that sensitivity implies for determining EU tax policy and (ii) exploring how the significant change of EU policy in 2003 to attempt to collect VAT on online services supplied by merchants outside of the EU affected the behavior of consumers inside the EU.

Bankruptcy Reform and Consumer Credit

Austan D. Goolsbee, Robert P. Gwinn Professor of Economics
Erik Hurst, Professor of Economics and Neubauer Family Faculty Fellow

Summary: Recent bankruptcy reform made it more difficult for households to declare bankruptcy. Despite the importance of understanding the response of both borrows and creditors to bankruptcy reform, little empirical work has addressed this question. Erik Hurst and coauthor Austan D. Goolsbee are asking what effect the recent bankruptcy reform has had on consumer credit markets. Their research is designed to ask whether borrower and creditor behavior changed abruptly with the passage (or the likelihood of passage) of the 2005 bankruptcy reform. They seek to find out whether credit card companies were more willing to supply credit to borrowers with poor credit ratings once the lenders were given more protections through the bankruptcy law and whether the low rated borrowers responded to the extension of credit or the risks of accumulating too much debt.

Emerging Markets Crises

Veronica Guerrieri, Assistant Professor of Economics

Summary: During the last two decades, emerging economies have experienced periods of growing investment, financed by international borrowing. These periods have been followed by episodes of financial distress and default. Veronica Guerrieri, Guido Lorenzoni, and Fabrizio Perri’s project suggests a tractable model of investment and default, and proposes to evaluate its ability to replicate basic quantitative features of observed episodes of financial crises. The current literature finds it hard to replicate the observed frequency of default episodes and the size of the current account deficits preceding default. By emphasizing the investment side of the model, Guerrieri, Lorenzoni, and Perri hope to overcome some of these quantitative problems. Their research also explores economies where the investment and default decisions are decentralized, and to study whether this decentralization leads to higher foreign borrowing, whether this generates inefficiencies, and how these can be corrected.

Bank Reform in China

Anil K Kashyap, Edward Eagle Brown Professor of Economics and Finance

Summary: China’s state-owned banks historically have funded money-losing enterprises to maintain employment and social stability. Kashyap and coauthor Wendy Dobson’s project involves a survey of China’s largest banks, which are being reformed to increase their competitiveness following China’s 2001 WTO commitment to open the domestic banking market by 2007. Their project combines macroeconomic, microeconomic, and anecdotal evidence suggesting that government influence, while less explicit than in the past, is continuing despite the reforms.

Dobson and Kashyap also propose to examine the tensions between government influence and the obligation of widely held commercial banks to make credit decisions based on objective appraisals of borrowers’ ability to repay. Their project explores a pair of alternative bank reform proposals that would help to reconcile the government’s conflicting objectives.

Litigation Risk and Cross-listing

Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance, and Accounting

Summary: There is mounting evidence that countries’ institutional frameworks play an important role for access to finance and equity valuations. In light of this evidence, cross-listing in countries with strong legal institutions has been suggested as a way for firms from countries with poor institutions to privately overcome these effects by effectively committing to a different regulatory framework. Several prior studies document that US cross-listings have significant effects on firms’ market values and their cost of capital and suggests that they offer substantial benefits to firms, but the mechanism by which this occurs is not yet well understood. Christian Leuz and coauthor Felix Oberholzer-Gee seek to understand the mechanism. One key issue is whether legal threats matter for the documented benefits of US cross-listings, but more broadly this study aims to contribute to the current debate on the costs and benefits of US cross-listing.

Loan Pushing and Foreign Aid

Atif Mian, Associate Professor of Finance
John Romalis, Associate Professor of Economics

Summary: Mian and Romalis propose to create a new data set related to trading patterns that can be used to study a pair of issues: pushing foreign-aid loans on borrowers and foreign-exchange windfalls. 

The first relates to the efficiency of subsidized foreign financial assistance to developing countries. This literature has mostly focused on recipient countries’ characteristics, and the broader evidence suggests that foreign subsidized credit is not always beneficial. Mian and Romalis propose to shift the focus to include a role for characteristics of the lending country. In particular, they will investigate whether the adverse outcomes might arise because lender countries might actively pursue a policy of “pushing” loans on developing economies as part of their domestic trade policy to boost exports. They will explore whether increased financial flows of different types increase the quantity and/or price of exports from the donor country in the cross-section as well as time-series and whether the effects differ by product type, governance characteristics of the recipient country or influence of the donor economy. 

Many developing economies rely heavily on commodities as their main export. Yet these countries are often small enough that they can be treated as price takers. This implies that unexpected fluctuations in commodity prices can have create large foreign exchange windfalls. How do these economies deal with such boons? Mian and Romalis propose to look at the connection between the spending associated with the windfalls and commodity-producing sector: the governance, financial and industrial structure of the commodity producing sector.

Sarbanes Oxley and Cross-listing

Joseph Piotroski, Associate Professor of Accounting
Suraj Srinivasan, Assistant Professor of Accounting

Summary: The passage of the Sarbanes-Oxley Act (the Act) dramatically shifted the costs of being a registered US company. The Act mandates that US registered firms adopt stronger governance practices, better internal controls, and greater corporate transparency. Minimal evidence exists on how foreign firms are responding to the heightened US rules. Piotroski and Srinivasan are examining cross-listing behavior on US and London stock exchanges following the enactment of Sarbanes-Oxley. Their research will test two propositions: (1) has the rate of foreign cross-listings onto US exchanges decreased in the period following the enactment of the Act; and (2) are foreign exchanges attracting foreign firms in the post-Sarbanes-Oxley period that would have otherwise listed on a US exchange prior to the enactment of Sarbanes-Oxley. Thus, they will be able to deduce whether the passage of the Sarbanes-Oxley Act has had material impact on the flow of international cross-listings, and if so, to understand what types of firms have been most impacted.

Capital Taxation and the Irish Growth Miracle

John Romalis, Associate Professor of Economics

Summary: The correlation between openness to international trade and both income and growth has triggered a lively debate as to whether international trade causes better growth outcomes. On one ‘side’ of the debate are advocates of free trade who argue that countries perform better with outward orientation than with import substitution. On the other side are those who take a more skeptical view of the evidence on the relationship between trade and growth. John Romalis proposes to add new evidence to the debate by studying the impact of increased developing-country openness—caused by declining developed-world tariffs—on developing-country growth.

Biases in Japanese Financial Disclosure

Douglas Skinner, John P. and Lillian A. Gould Professor of Accounting

Summary: A classic accounting issue is how corporate managers disclose information to capital market participants and how this information affects prices in securities markets. One strand of this research, which has been conducted in western economies, investigates managers’ “voluntary disclosures”, including management earnings forecasts and earnings guidance more generally. Douglas Skinner is expanding this research by examining financial disclosures in Japan. Japan is an interesting case to study because: (1) public companies in Japan are effectively required to provide management forecasts (of earnings and sales) when they announce actual earnings each six months and (2) litigation risk is very different in Japan. Thus contrasting patterns between the US and Japan will provide some evidence on the role of litigation concerns in driving disclosure.

Lobbying for Trade Protections

Francesco Trebbi, Assistant Professor of Economics

Summary: It is difficult to ignore the role played by interest groups in shaping policy decisions and the increasing amount of resources poured into the process. Total lobbying expenditures in the US have gone from $1.43 billion in 1998 to $2.28 billion in 2005 and campaign contributions to political candidates have followed a similar pattern. Francesco Trebbi and coauthor Matilde Bombardini are assembling a data set that will allow them to shed light on the following questions: (1) what is the relationship between various instruments interest groups have access to, (2) when an interest group is deciding which politician to contribute to, will it consider how the politician constituency is aligned with the group’s interests and (3) under what conditions and when do companies lobby. Trebbi and Bombardini will employ the data in two applications to a specific field of policy making: trade policy and protection of domestic markets. 

The Impact of Quality of Education and Growth

Luigi G. Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance 

Summary: It is hard to explain country differences in productivity and growth with traditional factors such as per-capita capital or degree of openness. One obvious explanation is that these might be driven by differences in human capital. The problem with this explanation is that human capital is always captured in terms of years of schooling, which is a very poor proxy for what really matters in the productivity of a country, i.e., the quality of human capital. Recently, the OECD has gathered information on the quality of education in a large cross-section of countries, testing students, from more than 40 countries, on culture-free, internationally comparable tests aimed to assess the distribution of abilities and their determinants at the individual level. This dataset permits for the first time the opportunity to link family level and school level variables to the performance of students in internationally comparable tasks. Luigi Zingales uses this dataset (1) to identify the determinants of the quality of education regressing individual performance on individual, family, school and country level factors and (2) to verify the contribution of human capital to the differences in countries’ economic performance.