Waterloo economics series | 2017

#17-001 -- Stéphanie Lluis and Brian McCall

Part-Time Work and Crowding-Out Implications of Employment Insurance Pilot Initiatives

Abstract

We apply a difference-in-differences estimation approach to analyze the effect of four Employment Insurance program initiatives which took place between 2004 and 2009 in a subset of Canadian Employment Insurance regions. The pilots increased the generosity of the EI system regarding EI eligibility, benefit amount, benefit duration and the allowable earning criteria. These pilots were run in about 50% of the EI regions until August 2008 providing a quasi-experimental setting to analyze the impact of increased generosity of EI on labour market outcomes. We use the Labour Force Survey data to study the aggregate impact of the four pilots on monthly labour force transitions into employment, unemployment and nonemployment as well as job search behaviour.

JEL Classification

J62; J65

#17-002 -- Yu Chen, Matthew Doyle and Francisco M. Gonzalez

Mismatch As Choice

Abstract

We characterize a competitive search equilibrium in which …rms in some markets create jobs that workers seek even though those jobs do not make the most productive use of workers’ skills. We refer to markets in which workers purposefully search for and accept inferior jobs as exhibiting directed mismatch. This kind of misallocation is driven by the fact that incomplete information about workers’outside options implies that the value of on-the-job search is higher for workers employed in those inferior jobs. Our theory provides new insights into the returns to education as well as the impact of on-the-job search on labor market mismatch. It also suggests that the declining fortunes of college educated American workers in recent decades, like those of high school graduates, are linked to the automation and offshoring of routine-task based jobs.

JEL Classification

D8; C78; E24

#17-003 -- Francisco M. Gonzalez, Itziar Lazkano and Sjak A. Smulders

Future-biased Intergenerational Altruism

Abstract

We show that intergenerational altruism suffers from future bias if generations overlap and people’s altruism concerns the well-being of immediate ancestors and descendants. Future bias involves preference reversals associated with increasing impatience, which can create a conflict of interest between current and future governments representing living generations. We explore the implications of this conflict for intergenerational redistribution when there is a sequence of utilitarian governments choosing policies independently over time. We show that future-biased governments can have an incentive to legislate and sustain a pay-as-you-go pension system, which can be understood, from the viewpoint of every government, as a self-enforcing commitment mechanism to increase future old-age transfers.

JEL Classification

D71; D72; H55

#17-004 -- Jean Guillaume Forand

Civil Service and the Growth of Government

Abstract

I study a dynamic model of electoral accountability which links the scale of government activity to the presence of civil service protections. In the model, voters with a demand for public goods forward tax revenue to the government and office-motivated governing parties delegate public spending to career-concerned civil servants. Governments always have power over civil service compensation, but civil service protections limit their ability to hire and fire civil servants. If civil servants are unprotected, civil service turnover matches government turnover and civil servants' interests are aligned with those of the party that hires them. To avoid wasteful partisan spending, voters only consent to minimal taxation. If civil servants are protected, they have no incentive to favour one party over another and governments produce only public goods, so that, in turn, voters consent to high taxes. However, because higher tax revenues increase the corruptibility of civil servants through favourable compensation policies, large-scale government activity is only achieved by inefficiently high wages in the civil service, which increase the frictions in the relationship between politicians and civil servants.

JEL Classification

H11; D73; H41

#17-005 -- Jean Guillaume Forand, Jan Zapal

The Demand and Supply of Favours in Dynamic Relationships

Abstract

We characterise the optimal demand and supply of favours in a dynamic principal-agent
model of joint production, in which heterogenous project opportunities arrive stochastically
and are publicly observed upon arrival, utility from these projects is non-transferable and
commitment to future production is limited. Our results characterise the optimal dynamic
contract, and we establish that the principal's supply of favours (the production of projects
that benefit the agent but not the principal) is backloaded, that the principal's demand
for favours (the production of projects that benefit the principal but not the agent) is
frontloaded, and that the production of projects is ordered by their comparative advantage,
that is, by their associated efficiency in extracting (for demanded projects) and providing
(for supplied projects) utility to the agent. Furthermore, we provide an exact construction
of the optimal contract when project opportunities follow a Markov process.

JEL Classification

 D86; C73; L24

#17-006 -- Jean Guillaume Forand and Metin Uyanik

Fixed Point Approaches to the Proof of the Bondareva-Shapley Theorem

Abstract

We provide two new proofs of the Bondareva-Shapley theorem, which states that the core of a transferable utility cooperative is nonempty if and only if the game is balanced. Both proofs exploit the fixed points of self-maps of the set of imputations, applying elementary existence arguments typically associated with noncooperative games to cooperative games.

JEL Classification

C71; C62

#17-007 -- Pierre Chaussé and George Luta

Casual Inference using Generalized Empirical Likelihood Methods

Abstract

In this paper, we propose a one step method for estimating the average treatment effect, when the assignment to treatment is not random. We use a misspecified generalized empirical likelihood setup in which we constrain the sample to be balanced. We show that the implied probabilities that we obtain play a similar role as the weights from the weighting methods based on the propensity score. In Monte Carlo simulations, we show that GEL dominates many existing methods in terms of bias and root mean squared errors. We then apply our method to the training program studied by Lalonde (1986).

JEL Classification

C21; C13; J01

#17-008 -- Pierre Chaussé

Regularized Empirical Likelihood as a Solution to the No Moment

Abstract

In this paper, we explore the finite sample properties of the generalized empirical likelihood for a continuum, applied to a linear model with endogenous regressors and many discrete moment conditions. In particular, we show that the estimator from this regularized version of GEL has finite moments. It therefore solves the issue regarding the no moment problem of empirical likelihood. We propose a data driven method to select the regularization parameter based on a cross validation criterion, and show that the method outperforms many existing methods when the number of instruments exceeds 20.

JEL Classification

C13; C30

#17-009 -- Hongxiu Li 

Innovation as Adaptation to Natural Disasters

Abstract

Can innovation be motivated by past natural disasters? Despite some recent research, the determinants of disaster-mitigating innovation are not well understood. Starting from a conceptual model combining perceived risk theory with the profit motive, this paper investigates the salience of innovation induced by natural disasters, using a unique dataset that includes U.S. patent data, and flood, drought, and earthquake damage data for the years 1977 to 2005. To address the potential endogeneity of disaster damage, I employ the control function approach with instrumental variables constructed from disaster intensity measurements. The results show that impact-reducing innovations at the state level respond to national disaster damage in the U.S. In general, the impact of natural disasters is not localized to a state–that is, disaster damage in a state also stimulates innovations in more-distant states.The findings in this paper highlight a policy role for the federal government in channelling and more effectively spurring impact- reducing innovations nationwide. 

JEL Classification

O31; Q54; Q55

#17-010 -- Joel Blit and Mauricio Zelaya

The impact of patent protection on R&D. Evidence using export markets.

Abstract

We examine whether stronger patent protection promotes private sector R&D, using changes in the patent rights regime of export destination countries as a quasi-exogenous source of variation. Constructing an export-weighted index of trade partner patent rights by country-industry-year, we find that R&D responds strongly to trade partner patent rights, and this after including country-industry, country-year, and industry-year fixed effects. This relationship is present in industries where patents are an effective way to protect innovation, but not in patent insensitive industries. Our results suggest a causal link between patent rights and firm R&D investments and support the inclusion of patent rights provisions in trade agreements.

JEL Classification

O34

#17-011 -- Joel Blit, Mikal Skuterud, Jue Zhang

Can skilled immigration policy raise innovation? Evidence from the Canadian Points System.

Abstract

We examine the effect of changes in skilled-immigrant population shares in 98 Canadian cities between 1981 and 2006 on per capita patents. The Canadian case is of interest because its `points system’ for selecting immigrants is viewed as a model of skilled immigration policy. Our estimates suggest that the impact of increasing the share of university-educated immigrants on patenting rates is smaller than the impact that both native-borns have in Canada and immigrants have in the U.S.. The modest contribution of Canadian immigrants to innovation is largely explained by the fact that only about one-third of Canadian STEM-educated immigrants find employment in STEM jobs (relative to two-fifths of the Canadian-born and one-half of immigrants in the U.S.). Consistent with this, we find a large and significant effect of STEMeducated immigrants when we also condition on STEM employment. Our results suggest potential benefits from giving employers a role in the selection of skilled immigrants.

JEL Classification

J61, J18, O31