Global Externalities, Local Policies, and Firm Selection

How to fight global problems with local tools? When only firms know what externality-producing activities can be relocated, policies shape the location distribution of firm types with different social values. We find that, because of this selection effect, the optimal local policies confront firms’ mobility with elevated corrective externality prices, in contrast with the common remedies for the relocation risk. Our mechanism incentivizes also moving firms to limit the externality, and it influences strategically the distribution of moving firms that comply with policies elsewhere. The magnitude of these effects is illustrated by a quantification for the key sectors in the EU emissions trading system.

Climate Change, Inequality, and Human Migration

This paper investigates the long-term implications of climate change on global migration and inequality. Accounting for the effects of changing temperatures, sea levels, and the frequency and intensity of natural disasters, we model the impact of climate change on productivity and utility in a dynamic general equilibrium framework. By endogenizing people’s migration decisions across millions of 5 × 5 km spatial cells, our approach sheds light on the magnitude and dyadic, education-specific structure of human migration induced by global warming. We find that climate change strongly intensifies global inequality and poverty, reinforces urbanization, and boosts migration from low- to high-latitude areas. Median projections suggest that climate change will induce a voluntary and a forced permanent relocation of 62 million working-age individuals over the course of the twenty-first century. Overall, under current international migration laws and policies, only a small fraction of people suffering the negative effects of climate change manages to move beyond their homelands. We conclude that it is unlikely that climate shocks will induce massive international flows of migrants, except under combined extremely pessimistic climate scenarios and highly permissive migration policies. By contrast, poverty resulting from climate change is a real threat to all of us.

Can Good Products Drive Out Bad? A Randomized Intervention in the Antimalarial Medicine Market in Uganda

How can quality be improved in markets in developing countries, which are known to be plagued by substandard and counterfeit (“fake” , in short) products? We study the market for antimalarial drugs in Uganda, where we randomly assign entry of a retailer (NGO) providing a superior product - an authentic drug priced below the market - and investigate how incumbent firms and consumers respond. We find that the presence of the NGO had economically important effects. Approximately one year after the new market actor entered, the share of incumbent firms selling fake drugs dropped by more than 50% in the intervention villages, with higher quality drugs sold at significantly lower prices. Household survey evidence further shows that the quality improvements were accompanied by consumers expecting fewer fake drugs sold by drug stores. The intervention increased use of the antimalarial drugs overall. The results are consistent with a simple model where the presence of a seller committed to high quality, as opposed to an average firm, strengthens reputational incentives for competing firms to improve quality in order to not be forced out of the market, leading to ‘good driving out bad’.

Can Simple Psychological Interventions Increase Preventive Health Investment?

Behavioral constraints may explain part of low demand for preventive health products. We test the effects of two light-touch psychological interventions on water chlorination and related health and economic outcomes using a randomized controlled trial among 3750 women in rural Kenya. One intervention encourages participants to visualize alternative realizations of the future; one builds participants’ ability to make concrete plans. After 12 weeks, visualization increases objectively measured chlorination, reduces diarrhea episodes among children, and increases savings. Effects on chlorination and savings persist after almost three years. Effects of the planning intervention are weaker and largely insignificant. Analysis of mechanisms suggests both interventions increase self-efficacy – beliefs about one’s ability to achieve desired outcomes. Visualization also increases participants’ skill in forecasting their future utility (Gabaix and Laibson 2017). The interventions do not differentially affect beliefs and knowledge about chlorination. Results suggest simple psychological interventions can increase future-oriented behaviors, including use of preventive health technologies.

Pre-Colonial Religious Institutions and Development: Evidence Through a Military Coup

This paper offers a novel illustration of the political economy of religion by examining the impact of religious elites on development. We compile a unique database on holy Muslim shrines across Pakistani Punjab and construct a historical panel of literacy spanning over a century (1901-2011). Using the 1977 military take-over as a universal shock that gave control over public goods to politicians, our difference-in-differences analysis shows that areas with a greater concentration of shrines experienced a substantially retarded growth in literacy after the coup. Our results suggest that the increase in average literacy rate would have been higher by 13% in the post-coup period in the absence of shrine influence. We directly address the selection concern that shrines might be situated in areas predisposed to lower literacy expansion. Finally, we argue that the coup devolved control over public goods to local politicians, and shrine elites, being more averse to education since it undermines their power, suppressed its expansion in shrine-dense areas.

The Effect of Pension Subsidies on the Retirement Timing of Older Women

I estimate the effect of additional pension benefits on women’s retirement decisions by examining a German pension subsidy program. The subsidies have a kinked relationship with the recipients’ past pension contributions, creating a sharply different slope of benefits for similar women on either side of the kink point. I find that a 100 euro increase in the monthly benefit induces female recipients to claim their pensions six months earlier. Recipients also adjust their labor supply by using unemployment insurance as a stepping stone to retirement and by reducing time spent in marginal employment. A back-of-the-envelope calculation suggests that the ratio of behavioral to mechanical costs for this subsidy program is 0.25, which is smaller than that of many other income support programs.

Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics

Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences (“use-dependent brain”). I show that experience effects help understand belief formation and decision-making in a wide range of economic applications, including inflation, home purchases, mortgage choices, and consumption expenditures. I argue that experience-based learning is broadly applicable to economic decision-making and discuss topics for future research in education, health, race, and gender economics.

Suboptimal Climate Policy

There is a scientific consensus that human activities, in the form of emissions of carbon dioxide into the atmosphere, cause global warming. These emissions mostly occur in the marketplace, i.e., they are undertaken by private individuals and firms. Governments seeking to curb emissions thus need to design policies that influence market behavior in the direction of their goals. Economists refer to Pigou taxation as “the” solution here, since the case of global warming can be seen as a pure (negative) externality. We agree. However, given the reluctance of policymakers to agree with us, there is an urgent need to consider, and compare, suboptimal policies. In this paper we look at one such instance: setting a global tax on carbon at the wrong level. How costly are different errors? Since there is much uncertainty about how much climate change there will be, and how damaging it is when it occurs, ex-post errors will most likely be made. We compare different kinds of errors qualitatively and quantitatively and find that policy errors based on over-pessimistic views on climate change are much less costly than those made based on over-optimism. This finding is an inherent feature of standard integrated assessment models, even though these models do not feature tipping points or strong linearities.

Climate-Change Pledges, Actions and Outcomes

We study countries’ compliance with the targets pledged in international climate-change agreements and the impact of those agreements and specific climate laws and policies on greenhouse-gas emissions and economic outcomes. To do so, we compile and codify data on international agreements and measures enacted at the national and sub-national levels. We find that compliance with targets has been mixed. Still, countries that signed the Kyoto Protocol or the Copenhagen Accord experienced significant reductions in emissions when compared to non-signatories. Having quantifiable targets led to further reductions. Effects from the Paris Agreement are not yet evident in the data. Carbon taxes and the introduction of emission-trading schemes led to material reductions in emissions. Other climate laws or policies do not appear to have had, individually, a material effect on emissions. The impact on GDP growth or inflation from most measures was largely insignificant. Overall, much more ambitious targets would be needed to offset the impact of economic and population growth on emissions and contain the expansion of the stock of gases.

Organising Competition for the Market

We study competition for the market in a setting where incumbents (and, to a lesser extent, neighbouring incumbents) benefit from a cost or information advantage. We first compare the outcome of staggered and synchronous tenders, before drawing the implications for market design. We find the timing of tenders interrelates with the likelihood of monopolisation. For high incumbency advantages and/or discount factors monopolisation is expected, in which case synchronous tendering is preferable as it strengthens the pressure that entrants exercise on the monopolist. For low incumbency advantages and/or discount factors other firms remain active, in which case staggered tendering is preferable as it maximises competitive pressure coming from the other firms. We use bus tendering in London to illustrate our insights and draw policy implications.