30 October 2012

Shale Gas Development and Property Values

The processes required to develop and produce natural gas from shale rock use a great deal of water and require underground, high-pressure, chemical injections. The risks associated with leasing one’s land to gas-exploration-and-production companies are especially important for those who depend on groundwater as a source of drinking water. Using data on property sales from 2004 to 2009 in an area with shale gas wells -- Washington County, Pennsylvania -- Lucija Muehlenbachs, Elisheba Spiller, and Christopher Timmins find that house prices are positively affected by the drilling of a shale gas well unless the property depends on groundwater. Such properties are negatively affected: by itself, groundwater risk reduces property values by up to 24 percent.

29 October 2012

Charitable Donations to Higher Education

Jeff Brown, Stephen Dimmock, and Scott Weisbenner find that donations to higher education - especially capital donations designated for university endowment or buildings - are positively and significantly correlated with the average income and house values in the university's home state. They also find that donations increase when a university suffers a large negative shock to its endowment relative to its operating budget.

26 October 2012

The U.S. Labor Market: Status Quo or a New Normal?

The Great Recession brought high rates of unemployment that have been slow to recede. When Edward Lazear and James Spletzer analyze labor market data, they find that the increased rates of unemployment in recent years cannot be explained by structural changes, industrial or demographic shifts, or a mismatch of skills with job vacancies. Instead, their findings suggest that unemployment is being caused by cyclical factors that are simply more pronounced during the current recession than in prior recessions.

25 October 2012

Public Procurement and the Private Supply of Green Buildings

Timothy Simcoe and Michael Toffel examine whether green building procurement policies which apply only to municipal buildings accelerate the use of green building practices by private-sector developers. The researchers find that the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standard for sustainable building practices diffuses nearly twice as quickly among private-sector developers in municipalities that adopt government-oriented green building procurement policies as in a matched control sample of cities of similar size, demographics, and environmental preferences. In addition, they find more LEED adoption among "neighbor cities" - those bordering the city that adopted a green building policy. They suggest that government purchasing policies may break deadlocks that emerge when coordinated investments are required to adopt a common standard, and that this in turn may stimulate the private-sector market for the goods and services targeted by government green procurement policies.

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 Ordoñez 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.
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