NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

24 October 2012

Analyzing Credit Booms and their Demise

Enrique Mendoza and Marco Terrones identify 70 credit booms -- episodes in which credit to the private sector rises significantly above its long-run trend -- that occurred in 61 emerging and industrial countries between 1960 and 2010. They find that in the upswing phase, credit booms are associated with periods of economic expansion, rising equity and house prices, real currency appreciation, and widening external deficits. Credit booms also tend to be synchronized internationally. They are similar in duration and magnitude in the industrial and the emerging economies, and often follow surges in capital inflows, gains in total factor productivity, and financial reforms. Credit booms are often followed by banking or currency crises, and they are far more common with managed than with flexible exchange rates.

23 October 2012

Economic Activity and Political Violence

Using data on violent incidents in the Philippines between 2001 and 2008, Eli Berman, Joseph Felter, Ethan Kapstein, and Erin Troland find a positive relationship between local economic activity and insurgent violence. This finding appears to support the "predation theory" of insurgent violence, in which a higher level of economic activity offers greater opportunities for insurgents to extract rents. This result does not support several other theories that try to explain insurgent violence, notably those that highlight the opportunity cost of individual participation in an insurgency, which rises with the level of economic activity, and those that posit that greater economic activity generates support for the established government.

22 October 2012

The Cyclical Response of Advertising

Firms advertise in order to stimulate demand for their products, so you would expect them to aggressively promote their high-profit-margin products. A rise in profit margins should expand advertising by a lot, and advertising should be highly counter-cyclical. However, Robert Hall finds that from 1950-2010 advertising was somewhat pro-cyclical: that is, the ratio of advertising spending to private GDP falls when the economy contracts. While wages decline in recessions and the labor share of income falls, the observed behavior of advertising refutes the hypothesis that these changes are associated with a rise in profit margins. Hall concludes that there must be another factor that lowers the wage without raising profit margins, perhaps a rise in a product-market friction with the same effect as an increase in sales taxes.

19 October 2012

The Asymmetric Effects of Financial Frictions

Economic variables -- including loan interest rates, investment, and output -- move relatively quickly and sharply during business cycle crises, but slowly and gradually during recoveries, especially in countries with less-developed financial systems. Using cross-country data, Guillermo Ordoņez shows that this asymmetry is stronger in less-developed countries because they experience greater financial frictions, including higher monitoring and bankruptcy costs. These frictions magnify the crisis reactions of lending rates and economic activity to shocks, and then delay their recovery by restricting the generation of information after the crisis.

18 October 2012

Medicare Part D Prescription Drug Insurance Exchange

Studying enrollment and price data on Medicare Part D prescription drug insurance plans for 2006 through 2010, Keith Ericson finds that older plans have approximately 10 percent higher premiums than comparable new plans. Firms initially set relatively low prices for newly introduced plans, but then raise prices as plans age while new, low-cost plans are introduced each year. The higher prices for older plans suggest that many consumers either find it difficult to switch plans or may procrastinate or forget to do so.

17 October 2012

Syndicated Loan Spreads and the Composition of the Syndicate

Over the past decade, finance companies, private equity firms, hedge funds, and mutual funds have played an increasing role as non-bank institutional investors in corporate lending. Jongha Lim, Bernadette Minton, and Michael Weisbach analyze over 20,000 leveraged loan facilities originated between 1997 and 2007 and find that loans from syndicates that include a non-bank institution display higher spreads than loans from facilities consisting only of banks. These researchers conclude that the loan facilities in which non-bank institutions participate would have had relatively few investors, or would have had difficulties in being fully subscribed, without such hedge funds or private equity funds. The spread premiums act as compensation that the non-bank institutional investors receive in exchange for providing liquidity to firms in the loan facility that is less in demand from other investors.

16 October 2012

The Effect of Pollution on Infant Mortality

Eva Arceo-Gomez, Rema Hanna, and Paulina Oliva construct weekly, municipality- level measures of air pollution and infant mortality for 48 municipalities across Mexico City between the years 1997 and 2006. They examine the effect of thermal inversions, which occur when a mass of hot air gets caught above a mass of cold air, trapping pollutants. They estimate that on average, an inversion leads to a 5.4 percent increase in carbon monoxide (CO), and that the effect of elevated CO levels on infant mortality rates in Mexico is larger than the effect found in studies of U.S. data.

15 October 2012

Effects of the Social Security Windfall Elimination Provision

Millions of federal, state, and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered. Simply applying the standard benefit formula only to their covered earnings would provide a higher replacement rate on those earnings than is appropriate given their total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to the earnings of individuals with non-covered employment. Jeff Brown and Scott Weisbenner find that the WEP reduces benefits disproportionately for lower earning households because it changes the marginal Social Security benefit only on the first $711 (in 2008) of average indexed monthly earnings.

12 October 2012

Physical Education and Obesity among Elementary School Children

Comparing states with different physical education (PE) requirements in elementary schools over the period 1998-2004, John Cawley, David Frisvold, and Chad Meyerhoefer find that PE requirements lower body mass index and reduce the probability of obesity among fifth graders (in particular, boys). They do not find that increased PE time crowds out time in academic courses or affects achievement test results.

11 October 2012

Manipulating Online Reviews

Dina Mayzlin, Yaniv Dover, and Judy Chevalier compare hotel reviews on Expedia.com and Tripadvisor.com to try to determine whether conscious manipulation of online reviews occurs. They note that anyone can post a review on Tripadvisor, but customers can only post a review of a hotel on Expedia if they have actually booked at least one night at the hotel through the website. Independent hotels that are individually owned have the most to gain from good reviews; branded chain hotels owned by multi-unit owners have the least to gain. The researchers find that hotels with a high incentive to fake reviews have a greater share of five-star (positive) reviews on Tripadvisor than on Expedia. They also find that the hotels that are neighbors of these hotels have more one- and two-star (negative) reviews on Tripadvisor than Expedia.
 
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