While economists recognize the important role of formal institutions in the promotionof trade, there is increasing agreement that institutions are typically endogenous to culture.The question remains how institutions interact with cultural variables when they areimposed exogenously. In social psychology, the individualism/collectivism distinction isthought to be an important cultural variable underlying many behavioral differences. Inthe first chapter, Erik kimbrough and I design an experiment to explore the relationship betweensubjects’ dispositions to individualism/collectivism and their willingness to engagein trade under enforcement institutions of varying strength. Overall, we find a positive effectof strong institutions on trade, but once we control for individualism/collectivism,institutions have no significant effect, and we observe that individualists engage in trademore often than collectivists. This suggests that cultural dispositions may even outweighinstitutions in the promotion of trade.The choice of enforcement mechanism in conducting long-distance trade has long beenassociated with cultural dispositions to individualism and collectivism. Nevertheless, theselection process of a formal or an informal enforcement mechanism and how it relatesto the reliability of the third party enforcement is unknown. In the second chapter, I designeda laboratory experiment in which the options for both a safe local trade and a riskyyet more profitable long-distance trade are available. Long-distance trade is governed byeither a formal or an informal enforcement mechanism. I examined the choice of informalversus formal enforcement mechanism while controlling for the cultural dispositionof subjects. I found that individuals with a collectivist cultural orientation used informalenforcement when effective formal enforcement is available significantly more frequentlythan those with an individualist orientation. Those with individualistic cultural orientationsubstituted formal enforcement for informal enforcement when the former created areliable contract.Enforceable property rights are the first steppingstones toward economic development.While nobles in some Western European countries successfully constrained sovereigns’arbitrary taxation, their Middle Eastern counterparts failed to gain similar rights. In thethird chapter, I compare the impact of Islamic inheritance law and that of primogeniture onthe welfare of economic agents. In the model, I define three types of agents: the sovereign,nobles and peasants. The nobles, unlike the peasants, own land. Furthermore, noblesalso own firms/estates that produce food. To protect their produce, nobles engaged ina conflict with an extractive sovereign to determine the tax rate. The findings demonstratedthat primogeniture led to a lower tax rate and higher welfare level for both noblesand the sovereign. Peasants, however, due to lower wages, suffered under primogeniture.
This thesis consists of two independent essays on financial econometrics. The first study introduces a new family of portmanteau tests for serial correlation. Using the wavelet transform, we decompose the variance of the underlying process into the variance of its low frequency and of its high frequency components and we design a variance ratio test of no serial correlation in the presence of dependence. Such decomposition can be carried out iteratively, each wavelet filter leading to a rich family of tests whose joint limiting null distribution is a multivariate normal. We illustrate the size and power properties of the proposed tests through Monte Carlo simulations. The second study focuses on counterparty risk and its role as a determinant of corporate credit spreads. However, there are only a few techniques available to isolate it from other factors. In this paper we describe a model of financial networks that is suitable for the construction of proxies for counterparty risk. Using data on the U.S. supplier-customer network of public companies, we find that, for each supplier, counterparties' leverage and jump risk are significant determinants of corporate credit spreads. Our findings are robust after controlling for several idiosyncratic, industry, and market factors.
Amid growing evidence of the importance of non-cognitive skills for both cognitive skill development and long-term outcomes, understanding the effect of education policies on non-cognitive skill formation is of increasing interest. The first two chapters of this thesis studies the effect of two school interventions on student behavior.The first paper of this Thesis (Chapter 1) provides the first evidence of the effect of multigrade classes on non-cognitive skills. I exploit strictly enforced class size caps accompanied by centralized funding rules to generate IV estimates of this effect using custom survey data administered to over 15000 parents of Kindergarten and Grade 1 students linked to publicly available administrative data on multigrade classes. I find that placing children in multigrade classes causes significantly more peer relationship problems and hyperactivity compared to single grade classrooms.The second paper of this Thesis (Chapter 2) my coauthors and I exploit the staggered rollout of universal full-day Kindergarten (FDK) to estimate its effects on children’s behavior. Our research design identifies these effects by comparing across-cohort changes in outcomes among early versus late adopting schools. We find little effect of FDK on child behavior or parents’ mental health, and an increase in hours worked by parents who are employedpart-time. These results hold across a range of child and family characteristics, with one exception. In families who do not speak English at home, FDK reduces child hyperactivity and peer relationship problems, improves parents’ mental health and increases employment and hours.The last paper of this Thesis (Chapter 3) was triggered by a heated debate in the Iranian parliament over the effectiveness of the "1993 Population Control Law". There has been a long debate among economists and policy makers over the effectiveness of population planning programs. The estimated program effects in the literature vary substantially. One such program is the Iranian 1993 Population Control Law that withdrew paid maternity leave and social welfare subsidies in the case of children of fourth and higher parities. My coauthor and I use data from publicly available sample 2006 census data in Iran and the annual Household Expenditure and Income Surveys (HEIS: 1988-2005) to estimate the effect of this policy on fertility outcomes. Our difference in difference method compares the change in probability of having birth in families with fewer than three children prior to the legislation to the change in probability of having birth of families with three or more children. We find that the legislation had a modest effect of 8 to 13 percent on decreasing the probability of a fourth or higher birth. The law has the highest impact after four years of implementation and after that effect size gradually goes away.
Economists have become very interested in the relationship between monetary policy and inflation expectations. However, most research has focused on professional forecasters rather than consumers' expectations. This paper explores interactions between monetary policy and consumer expectations. Specifically, we estimate the impact of monetary policy shocks on consumer expectations. Using a simple linear regression model and data from the Michigan Survey of Consumers, we found somewhat surprising results. Namely, that consumers adjust their expectations positively in response to an unexpected tightening of monetary policy. This suggests the existence of the "signalling channel" of monetary policy. We control for a host of macroeconomic and demographic variables, and our results are consistent across income and education groups. In line with previous research, we found greater heterogeneity in expectations for lower-income and lower-educated groups. Our research challenges conventional thinking regarding the influence of monetary policy on inflation Expectations, and suggests that this relationship is more complex.
This thesis addresses three topics in modern financial economics. In econometrics, we propose a consistent estimator for a model with both smooth structural changes and abrupt structural breaks. Our methodology is particularly well-suited for modern high frequency data. In market microstructure, we show that the traditional paradigm is no longer applicable in general, in light of recent technological evolution in trading and associated change in market behavior. In financial networks, we consider determinants of systematic risk that is due to the structure and stability of the network underlying the financial system. We propose a pricing factor that captures the diversification vs. contagion risk trade-off of the interconnectedness of the network.
My dissertation focuses on the macroeconomic consequences of China's one-child policy. The first chapter examines the effects of China's one-child policy on savings and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. As in Song, Storesletten and Zilibotti (2011), government-owned firms are assumed to be less productive but have better access to the credit market compare to entrepreneurial firms. As labor switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. In the second chapter of my dissertation, I provide a theoretical framework for examining the effects of China's one-child policy on its long run economic growth. The model incorporates within family intergenerational transfers and a "quantity/quality" tradeoff. When a population control policy is implemented, parents increase investment in their children's education in order to compensate for reduction in future transfers. As in Galor and Weil (2010), technological progress is assumed to be driven by two forces: the population size and the level of education. With population control, the total population decreases and the average level of education increases. Thus, the overall effect on technological progress is ambiguous without specifying functional forms for technology and human capital. The third chapter provides a quantitative exploration of the model from the second chapter. The calibrated results are consistent with the model, in which population, technological progress, and income per capita move in endogenous cycles. The impact of China's one-child policy depends on the timing of the policy. If the policy is enforced when the population is large enough, hence when the rate of technological progress is high, it increases GDP growth both in the short-run and in the long-run.
I explore the theoretical foundations and the empirical relevance of the idea that entrepreneurship in developing countries could arise out of poor or non-existent alternatives. In the first chapter, I use an occupational choice model to show that the observed large increase in the rate of business ownership in rural Thailand during the 1997 Asian crisis can be explained by a negative shock to the labor market. According to my GMM estimates, a 47% fall in the outside option of entrepreneurship is required to explain the observed increase in business ownership from 17% to 37% between 1997 and 1998. I find that endogenously starting a business enabled households to offset about 40% of the income loss during the crisis, but also that low entrepreneurial productivity limits the extent to which pro-business policies can stand in as unemployment insurance for the average household. In the second chapter, joint with A. Karaivanov, we explicitly model and distinguish between voluntary and so-called involuntary entrepreneurship, which arises for those who prefer the non-business occupation (e.g., wage work) but cannot obtain it (with some probability that we estimate), due to labor market frictions. We also allow for credit constraints and analyze their interaction with the labor market constraint. We estimate the model via GMM using data from semi-urban Thailand from 2005, and find that 11% of all households in our sample (approximately 17% of all households running a business) are classified as involuntary entrepreneurs. While there are large potential income gains, especially for poorer households, from relaxing either the labor market or credit constraints, involuntary entrepreneurship can only be significantly reduced by addressing the labor market constraint. In the final chapter, I structurally estimate a model in which risk neutral agents maximize total income by optimally allocating capital and labor into entrepreneurship, subject to credit and time constraints. I estimate the model via GMM using 2005 Thai urban data, where about 20% of business owners report a second occupation. I find that while most entrepreneurs that hold two jobs are skill-constrained (the first-best scale of the business does not exhaust the time-constraint), there is a small fraction that are credit-constrained. These two groups within the multiple occupation group are also predicted to be considerably heterogeneous in terms of initial wealth, schooling and entrepreneurial talent.
At least since Knight (1921), economists have suspected that the distinction between risk and `uncertainty' might be important in economics. However,Savage (1954) showed this distinction is meaningless if agents adhere to certain axioms, which seem to be normatively compelling. Savage's SubjectiveExpected Utility (SEU) model became the dominant paradigm in economics, and remains so to this very day. Still, suspicions that the distinction matters never really died. The Ellsberg Paradox (1961) first raised doubts about the SEU model. Then, Gilboa and Schmeidler (1989) showed how to modifySavage's axioms so that the distinction does matter. In their model, agents entertain a set of priors, and optimize against the worst-caseprior. Finally, Hansen and Sargent (2008) operationalized this new approach by linking it to the engineering literature on `robust control'. My dissertationapplies the Hansen-Sargent framework to the foreign exchange market. I show that if we think of market participants as confronting both uncertainty andrisk, then we can easily explain several well known empirical puzzles in the foreign exchange market.The second chapter of my dissertation, entitled "Robustness and Exchange Rate Volatility", was published in the Journal of International Economics in 2013, and is coauthored with my supervisor, Prof. Kenneth Kasa. This paper uses the monetary model of exchange rates. It assumes investors are aware of their own lack of knowledge about the economy. They respond to their ignorance strategically, by constructing forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more sensitive to new information, and can easily explain observed violations of Shiller's variance bound inequality.The third chapter, entitled "Model Uncertainty and the Forward Premium Puzzle", was published in the "Journal of International Money and Finance" in 2014. It studies a standard two-country Lucas (1982) asset-pricing model. The main objective is to understand the determinants of observed excess return in the foreign exchange market. The paper shows that Hansen-Jagannathan (1991) volatility bounds can be attained with both reasonable degrees of risk aversion and empirically plausible detection error probabilities. Hence, excess returns in the foreign exchange market appear to be primarily driven by a `model uncertainty premium' rather than a risk premium.The fourth chaper, entitled "Robust Learning in the Foreign Exchange Market", was recently revised and resubmitted to the "Canadian Journal of Economics". Following Hansen and Sargent (2010), it assumes agents cope with uncertainty by both learning and by formulating robust decision rules. Agents entertain two competing models, differing by the persistence of consumption growth. As in my previous paper, agents continue to doubt the specification of each model. It shows that robust learning can not only explain unconditional risk premia in the foreign exchange market, but can also explain the cyclical dynamics of risk premia. In particular, an empirically plausible concern for model misspecification and model uncertainty generates a stochastic discount factor that uniformly satisfies the spectral Hansen-Jagannathan bound of Otrok et. al. (2007).
Several empirical considerations have emerged over the last decade, which are central to the debate on convergence of international income levels. For instance, there has been discussion over the use of total factor productivity, as opposed to income per capita or labour productivity, as the basis for convergence studies. Further, there is the question of sample selection: that is, what set of countries should be used. Many other considerations, such as the use of trended data, the robustness of results over time, the use of purchasing power parity estimates, and errors in estimation, are also at issue. This essay will examine these issues, and discuss them in the context of several well known empirical studies.
This essay examines why, over the last several hundred years, significant economic growth has occurred in the West, but not elsewhere. It concludes that, although institutional considerations and the process of innovation have been intrinsic elements of Western progress, neither serves as a complete explanation. Further causes, many of which are primarily cultural, social, or geographic, must be taken into account. Any attempt to answer the question of Western progress must involve the above concerns, otherwise it will be at best incomplete.