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Working papers

IGIER fellows and affiliates publish books and articles in academic journals. Their current research projects are featured in the Working Paper series. 

2017 - n° 607
We consider a game with sequential moves played by agents who are randomly drawn from large populations and matched. We assume that, when players are uncertain about the strategy distributions of the opponents, preferences over actions at any information set admit a smooth-ambiguity representation in the sense of Klibanoff, Marinacci, and Mukerji (Econometrica, 2005). This may induce dynamically inconsis- tent preferences and calls for an appropriate definition of sequential best response. We take this into account in our analysis of self-confirming equilibrium (SCE) and rationalizable SCE in sequential games with feedback played by agents with non-neutral ambiguity attitudes. Battigalli, Cerreia-Vioglio, Maccheroni, and Marinacci (Amer. Econ. Rev., 2015) show that the set of SCE's of a simultaneous-move game with feedback expands as ambiguity aversion increases. We show by example that SCE in a sequential game is not equivalent to SCE applied to the strategic form of such game, and that the previous monotonicity result does not extend to general sequential games. Still, we provide sufficient conditions under which the monotonicity result holds for (rationalizable) SCE.

P. Battigalli, E. Catonini, G. Lanzani, and M. Marinacci
Keywords: Sequential games with feedback, smooth ambiguity, self-confirming equilibrium, rationalizable self-confirming equilibrium
2017 - n° 606
The Wold decomposition of a weakly stationary time series extends to the multivariate case by allowing each entry of a weakly stationary vectorial process to linearly depend on the components of a vector of shocks. Since univariate coefficients are replaced by matrices, we propose a modelling approach based on Hilbert A-modules defined over the algebra of squared matrices. The Abstract Wold Theorem for Hilbert A-modules, that we prove, delivers two orthogonal decompositions of vectorial processes: the Multivariate Classical Wold Decomposition, which exploits the lag operator as isometry, and the Multivariate Extended Wold Decomposition, where a scaling operator is employed. The latter enables us to disentangle the heterogeneous levels of persistence of a weakly stationary vectorial process. Hence, the persistent components of the macro-financial variables into consideration are related to the overlapping of different sources of randomness with specific persistence. We finally provide a simple application to V AR models.

Simone Cerreia-Vioglio, Fulvio Ortu, Federico Severino, Claudio Tebaldi
2017 - n° 605
It is argued that crises open up a window of opportunity to implement policies that otherwise would not have the necessary political backing. The argument goes that the political cost of deep reforms declines as crises unravel structural problems that need to be urgently rectified and the public is more willing to bear the pains associated with such reforms. This paper casts doubt on this prevalent view by showing that not only the crises-reforms hypothesis is unfounded in the data, but rather crises are associated with slowing structural reforms depending on the institutional environment. In particular, we look at measures of liberalization in international trade, agriculture, network industries, and financial markets. We find that, after a financial crisis, democracies neither open nor close their economy. On the contrary, autocracies reduce liberalizations in multiple economic sectors, as the fear of regime change might lead non-democratic rulers to please vested economic interests.

Gunes Gokmen, Massimiliano Gaetano Onorato, Tommaso Nannicini, Chris Papageorgiou
Keywords: Financial crises, structural reforms, institutional systems, IMF programs, government crises, public opinion
2017 - n° 604
We establish sufficient conditions that ensure the uniqueness of Tarski-type fifixed points of monotone operators. Several applications are presented.
Massimo Marinacci Luigi Montrucchio
2017 - n° 603
We propose a new theoretical approach to the study of editing rules applied by decision makers when dealing with repeated lotteries. Under the assumption that decision makers detect statedominance among simply two-outcome lotteries and always prefer n draws of a dominating lottery to n draws of a dominated lottery, we study editing rules beyond the use of acceptance rates. We derive an appropriate experimental methodology based on loss and gain differences, which also allows us to quantify the strength of preferences. An experiment supports previous findings showing that editing might depend on the risk profile of the underlying lottery. Moreover, we provide evidence that acceptance rates could lead to different conclusions than our methodology, because they generally do not account for the strength of preferences.

Alessandra Cillo and Enrico De Giorgi
Keywords: editing, segregation, aggregation, repeated lotteries
2017 - n° 602
We extend the epistemic analysis of dynamic games of Battigalli and Siniscalchi (1999, 2002, 2007) from finite dynamic games to all simple games, that is, finite and infinite-horizon games with finite action sets at non-terminal stages and compact action sets at terminal stages. We prove a generalization of Lubin's (1974) extension result to deal with conditional probability systems and strong belief. With this, we can provide a short proof of the following result: in every simple dynamic game, strong rationalizability characterizes the behavioral implications of rationality and common strong belief in rationality.

Pierpaolo Battigalli, Gabriele Beneduci, Pietro Tebaldi
Keywords: Epistemic game theory, simple infinite dynamic game, strong belief, strong rationalizability
2017 - n° 601
Employing a wide range of individual-level surveys, we study the extent of cultural and institutional heterogeneity within the EU and how this changed between 1980 and 2008. We present several novel empirical regularities that paint a complex picture. While Europe has experienced both systematic economic convergence and an increased coordination across national and subnational business cycles since 1980, this was not accompanied by cultural nor institutional convergence. Such persistent heterogeneity does not necessarily spell doom for further political integration, however. Compared to observed heterogeneity within member states themselves, or in well functioning federations such as the US, cultural diversity across EU members is a similar order of magnitude. The main stumbling block on the road to further political integration may not be heterogeneity in fundamental cultural traits, but other cleavages, such as national identities.
Alberto Alesina, Guido Tabellini, and Francesco Trebbi
2017 - n° 600
Do banks with low capital extend excessive credit to weak firms, and does this matter for aggregate efficiency? Using a unique data set that covers almost all bank-firm relationships in Italy in the period 2008-2013, we find that, during the Eurozone financial crisis: (i) Under-capitalized banks cut credit to healthy firms (but not to zombie firms) and are more likely to prolong a credit relationship with a zombie firm, compared to stronger banks. (ii) In areas-sectors with more lowcapital banks, zombie firms are more likely to survive and non-zombies are more likely to go bankrupt; (iii) Nevertheless, bank under-capitalization does not hurt the growth rate of healthy firms, while it allows zombie firms to grow faster. This goes against previous in

uential findings that, we argue, face serious identification problems. Thus, while banks with low capital can be an important source of aggregate inefficiency in the long run, their contribution to the severity of the great recession via capital misallocation was modest.

Fabiano Schivardi, Enrico Sette, Guido Tabellini
Keywords: Bank capitalization, zombie lending, capital misallocation
2017 - n° 599
This paper develops a theoretical model of voters' and politicians' behavior based on the notion that voters focus disproportionately on, and hence overweight, certain attributes of policies. We assume that policies have two attributes and that voters focus more on the attribute in which their options differ more. First, we consider exogenous policies and show that voters' focusing polarizes the electorate. Second, we consider the endogenous supply of policies by office-motivated politicians who take voters' distorted focus into account. We show that focusing leads to inefficient policies, which cater excessively to a subset of voters: social groups that are larger, have more distorted focus, are more moderate, and are more sensitive to changes in a single attribute are more influential. Finally, we show that augmenting the classical models of voting and electoral competition with focusing can contribute to explain puzzling stylized facts as the inverse correlation between income inequality and redistribution or the backlash effect of extreme policies.

Salvatore Nunnari Jan Zapal
Keywords: Focus; Attention; Salience; Political Polarization; Probabilistic Voting Model; Electoral Competition; Behavioral Political Economy; Income Inequality; Redistribution
2017 - n° 598
The economic impact of exported institutions depends on the underlying cultural environment of the receiving country. We present evidence that cultural proximity between the exporting and the receiving country positively affects the adoption of new institutions and the resulting long-term economic outcomes. We obtain this result by combining new information on pre-Napoleonic kingdoms with county-level census data from nineteenthcentury Prussia. This environment allows us to exploit a quasi-natural experiment generated by radical Napoleonic institutional reforms and deeply rooted cultural heterogeneity across Prussian counties. We show that counties that are culturally more similar to France, in terms of either religious affiliation or historical exposure to French culture, display better long-term economic performance. We analyze a range of alternative explanations and suggest that our findings are most easily explained by cultural proximity facilitating the adoption of new institutions.

Giampaolo Lecce and Laura Ogliari
Keywords: Institution s, Institutional Transplants, Culture, Economic Growth
2017 - n° 597
This paper documents time-variation in the relation between oil price and U.S. equity returns based on both reduced-form and structural analyses. Our reduced-form analysis suggests that a positive correlation between equity returns and oil price has emerged starting from the financial crisis. Based on our structural analysis, we find that oil-specific demand shocks have had positive effects on the U.S. stock market since 2008 as opposed to oil supply shocks, which have no large effects on stock re turns. We also show that the time variation in the parameters of the structural VAR is very well explained by the level of the U.S. short-term interest rate and shifts in consumer confidence.

Claudia Foroni Pierre Guérin Massimiliano Marcellino
Keywords: Stock Returns, Oil Market Shocks, Time-varying Parameter VAR
2017 - n° 596
We model theoretically and quantify empirically the impact of informational frictions on managerial decisions in the context of mergers and acquisitions. In particular, we focus on how bid premiums and methods of payment are affected by the bidder and target firms' degrees of opacity. To this end, we model the negotiation between bidder and target as a signaling game with two-sided private information. We then empirically test the model's predictions concerning the effects of target and bidder opacity on the simultaneous determination of the method of payment and the bid premium, by conditioning cross-sectionally on the basis of firms' stock trading properties, which we interpret as representative of individual firm opacity. Consistently with the predictions of our model, we find, by studying a sample of bids by and for U.S. publicly listed firms over the period 1985-2014, that both the likelihood of a stock bid and the bid premium increase with the opacity of the target, while the opacity of the bidder is related to lower bid premiums.

Pierpaolo Battigalli, Carlo Chiarella, Stefano Gatti, Tommaso Orlando
Keywords: Asymmetric information, mergers and acquisitions, method of payment, bid premium
2017 - n° 595
We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the models insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee changes by one venue affect market quality and market shares for all venues that compete for order flow. Furthermore, we document cross-sectional differences in changes in market quality and market shares following a simultaneous decrease in both make and take fees consistent with traders in large (small) capitalization stocks being more sensitive to the change in make (take) fees.

Marios Panayides, Barbara Rindi, Ingrid M. Werner
Keywords: Trading Fees, Maker-Taker Pricing, Intermarket Competition, Limit Order Book
2017 - n° 594
Today, income inequality in Sub-Saharan Africa is exceptionally high. In this paper, we study whether present-day inequality can be traced back to the colonial period by reconstructing income distributions in a sample of representative colonies. To do so, we use data from colonial records to build new social tables for French colonies in West and Central Africa and we combine them with available information on British colonies in East and Southern Africa. We find that inequality in Africa is not a recent phenomenon. Income inequality was extremely high during the colonial period, in particular because of the huge income differential between Africans and European settlers. Nevertheless, it tended to reduce over time and the post-colonial period is characterized by much lower inequality. Interestingly, the decline of inequality is not necessarily a consequence of independence: the trends toward reduction started under colonial rule.

Guido Alfani and Federico Tadei
Keywords: Africa, Inequality, Income Distribution, Development, Extractive Institutions
2016 - n° 593
We characterize consistent random choice rules in terms of the optimality of the support. We then proceed to study stochastic choice in a consumer theory setting. We prove a law of demand for stochastic choice. We then move to a temporal setting where we characterize the softmax decision criterion.
S. Cerreia-Vioglio, F. Maccheroni, M. Marinacci, and A. Rustichini
2016 - n° 591
We introduce a new approach for the estimation of high-dimensional factor models with regime-switching factor loadings by extending the linear three-pass regression filter to settings where parameters can vary according to Markov processes. The new method, denoted as Markov-Switching three-pass regression filter (MS-3PRF), is suitable for datasets with large cross-sectional dimensions since estimation and inference are straightforward, as opposed to existing regime-switching factor models, where computational complexity limits applicability to few variables. In a Monte- Carlo experiment, we study the finite sample properties of the MS-3PRF and find that it performs favorably compared with alternative modelling approaches whenever there is structural instability in factor loadings. As empirical applications, we consider forecasting economic activity and bilateral exchange rates, finding that the MS-3PRF approach is competitive in both cases.

Pierre Guerin, Danilo Leiva-Leon, Massimiliano Marcellino
Keywords: Factor model, Markov-switching, Forecasting
2016 - n° 590
We study whether providing information about immigrants affects people's attitude towards them. First, we use a large representative cross-country experiment to show that, when people are told the share of immigrants in their country, they become less likely to state that there are too many of them. Then, we conduct two online experiments in the U.S., where we provide half of the participants with five statistics about immigration, before evaluating their attitude towards immigrants with self-reported and behavioral measures. This more comprehensive intervention improves people's attitude towards existing immigrants, although it does not change people's policy preferences regarding immigration. Republicans become more willing to increase legal immigration after receiving the information treatment. Finally, we also measure the same self-reported policy preferences, attitudes, and beliefs in a four-week follow-up, and we show that the treatment effects persist.

Alexis Grigorieff, Christopher Roth, Diego Ubfal
Keywords: Biased Beliefs, Survey Experiment, Immigration, Policy Preferences, Persistence
2016 - n° 589
We study a decision maker characterized by two binary relations. The first reflects his judgments about well-being, his mental preferences. The second describes the decision maker's choice behavior, his behavioral preferences, the ones that govern choice (see Rubin- stein and Salant, 2008a,b). Specififically, in the context of decision making under uncertainty, we propose axioms that may describe the rationality of these two relations. These axioms allow a joint representation by a single set of probabilities and a single utility function. It is mentally rational to prefer f over g if and only if the expected utility of f is at least as high as that of g for all probabilities in the set. It is behaviorally rationalizable to choose f over g if and only if the expected utility of f is at least as high as that of g for some probability in the set. In other words, mental and behavioral preferences admit, respectively, a representation a la Bewley (2002) and a la Lehrer and Teper (2011). Our results also provide foundation for a decision analysis procedure called robust ordinal regression and proposed by Greco, Mousseau, and Slowinski (2008).
S. Cerreia-Vioglio, A. Giarlotta, S. Greco, F. Maccheroni, M. Marinacci
2016 - n° 588
We consider an uncertainty averse, sophisticated decision maker facing a recurrent decision problem where information is generated endogenously. In this context, we study self-confirming strategies as the outcomes of a process of active experimentation. We provide inter alia a learning foundation for self-confirming equilibrium with model uncertainty (Battigalli et al., 2015). We also argue that ambiguity aversion tends to stifle experimentation, increasing the likelihood that decision maker get stuck into suboptimal certainty traps.
P. Battigalli,A. Francetich, G. Lanzani, M. Marinacci
2016 - n° 587
This paper addresses theoretically the question whether culture has an effect on economic performance in team production, and which would be the optimal team culture. The members of the team are guided both by economic incentives and by personal norms, weighed according to their prevailing level of materialism. We assume that personal norms evolve following a dynamics driven by a combination of psychological mechanisms such as consistency and conformism. The different vectors of materialism, consistency and conformity shared by the group result in a continuum of cultures with different combinations of individualism and collectivism. Our main results show how team culture turns out to be a fundamental determinant for group performance. When income distribution is not completely egalitarian or the members of the team display heterogeneous levels of skills, culture matters in the sense that there exists an optimal culture that maximizes team production and its characteristics depend on the specific distributions of income and skills. A higher average productivity or a more inegalitarian dispersion of remunerations requires a more collectivist culture. And a higher dispersion of individual productivities requires a more individualist culture.
Vicente Calabuig, Gonzalo Olcina, and Fabrizio Panebianco
2016 - n° 586
We use impulse response functions computed from linear and nonlinear, Markov switching models to investigate the strength of four alternative contagion channels. These are the flight-to-quality, flight-to-liquidity, risk premium, and correlated information channels. We study the differences among estimates and impulse response functions across linear and nonlinear models to identify and measure cross-asset contagion. An application to weekly Eurozone data for a 2007-2014 sample, reveals that a two-state Markov switching model shows accurately estimated but economically weak contagion effects in a crisis regime. These results are mainly explained by a flight-to-quality channel. Furthermore, we extend our analysis the analysis to investigate whether European market may be subject to contagion when exposed to external shocks, such as those originated from the US subprime crisis.

Massimo Guidolin and Manuela Pedio
Keywords: Contagion channels, Markov switching models, vector autoregressions, impulse response function, flight-to-quality, flight-to-liquidity, risk premium
2016 - n° 585
We propose a Bayesian panel model for mixed frequency data whose parameters can change over time according to a Markov process. Our model allows for both structural instability and random effects. We develop a proper Markov Chain Monte Carlo algorithm for sampling from the joint posterior distribution of the model parameters and test its properties in simulation experiments. We use the model to study the effects of macroeconomic uncertainty and financial uncertainty on a set of variables in a multi-country context including the US, several European countries and Japan. We find that for most of the variables financial uncertainty dominates macroeconomic uncertainty. Furthermore, we show that uncertainty coefficients differ if the economy is in a contraction regime or in an expansion regime.

Roberto Casarin, Claudia Foroni, Massimiliano Marcellino, and Francesco Ravazzolo
Keywords: dynamic panel model, mixed-frequency, Markov switching, Bayesian inference, MCMC
2016 - n° 584
Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.

Chiara Fumagalli and Massimo Motta
Keywords: Market-Share Discounts, Inefficient Foreclosure, Exclusive Dealing, Antitrust Policy
2016 - n° 583
In this paper, we run a laboratory experiment where the information set is relatively rich, and, in particular, it includes audits on other taxpayers. At the same time, the implementation of the Bayesian updating process for the subjective probability to be audited is fairly simple. By doing so, we are able to elicit a range of consistent but heterogeneous probability beliefs and to distinguish between Bayesian and non-Bayesian subjects. We obtain two major results concerning Bayesian subjects. First, they exhibit strong and robust short-run BoCE. Second, they are seemingly not affected by audits on other taxpayers in their compliance decision. These results are robust to different definitions of Bayesianity and to different specifications. They conflict with the evidence that Bayesian agents do perceive correctly the chance to be audited. In turn, this suggests that existing explanations of the BoCE are not entirely satisfactory and that alternative theories, possibly based on the Duality approach, are needed.

Luigi Mittone, Fabrizio Panebianco, Alessandro Santoro
Keywords: Bomb-crater effect, Bayesian Updating, Behavioral Duality
2016 - n° 582
We investigate how Internal Labor Markets (ILMs) allow organizations to accommodate shocks calling for costly labor adjustments. Using data on workers' mobility within French business groups, we find that adverse shocks affecting affliated firms boost the proportion of workers redeployed to other group units rather than external firms. This effect is stronger when labor regulations are stricter and destination-firms are more efficient or enjoy better growth opportunities. Affiliated firms hit by positive shocks rely on the ILM for new hires, especially high-skilled workers. Overall, ILMs emerge as a co-insurance mechanism within organizations, providing job stability to employees as a by-product.

Giacinta Cestone, Chiara Fumagalli, Francis Kramarz, Giovanni Pica
Keywords: Internal Labor Markets, Organizations, Business Groups
2016 - n° 581
The risk-neutral pricing formula provides the valuation of random payoffs in continuous-time markets. Despite the variety of payoffs, no arbitrage price dynamics are driven by the same (possibly stochastic) interest rate. We formalize this intuition by showing that no arbitrage prices constitute the solution of a differential equation, where interest rates are prominent. To achieve this goal, we introduce the notion of weak time-derivative, which permits to differentiate adapted processes. This instrument isolates drifts of semimartingales and it is null for martingales. Finally, we reformulate the eigenvalue problem of Hansen and Scheinkman (2009) by employing weak time-derivatives.

Massimo Marinacci and Federico Severino
Keywords: no arbitrage pricing; weak time-derivative; martingale component; special semimartingales; stochastic interest rates
2016 - n° 580
We experimentally test the impact of expanding access to basic bank accounts in Uganda, Malawi, and Chile. Over two years, 17%, 10%, and 3% of treatment individuals made five or more deposits, respectively. Average monthly deposits for them were at the 79th, 91st, and 96th percentiles of baseline savings. Survey data show no clearly discernible intention-to-treat effects on savings or any downstream outcomes. This suggests that policies merely focused on expanding access to basic accounts are unlikely to improve welfare noticeably since impacts, even if present, are likely small and diverse.

Pascaline Dupas, Dean Karlan, Jonathan Robinson, and Diego Ubfal
Keywords: financial access; savings; banking; micro-finance; field experiment; multicountry; Uganda; Malawi; Chile
2016 - n° 579
Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way.

Fabrizio Panebianco, Thierry Verdier, Yves Zenou
Keywords: Networks, diffusion centrality, targets, innovation
2016 - n° 578
We study from a preferential viewpoint absolute and relative attitudes toward ambiguity determined by wealth effects. We provide different characterizations of these attitudes for a large class of preferences: monotone and continuous preferences which satisfy risk independence. We specify our results for different subclasses of preferences.
S. Cerreia-Vioglio, F. Maccheroni, and M. Marinacci
2016 - n° 577
Pre-Hilbert A-Modules are a natural generalization of inner product spaces in which the scalars are allowed to be from an arbitrary algebra. In this perspective, submodules are the generalization of vector subspaces. The notion of orthogonality generalizes in an obvious way too. In this paper, we provide necessary and sufficient topological conditions for a submodule to be orthogonally complemented. We present three applications of our results. In the most important one, we obtain the Kunita-Watanabe decomposition for conditionally square-integrable martingales as an orthogonal decomposition result carried out in an opportune pre-Hilbert A-module. Second, we show that a version of Stricker's Lemma can be also derived as a corollary of our results. Finally, we provide a version of the Koopman-von Neumann decomposition theorem for a specific pre-Hilbert module which is useful in Ergodic Theory.
S. Cerreia-Vioglio, F. Maccheroni, and M. Marinacci
2016 - n° 576
The results of an experiment extending Ellsberg's setup demonstrate that attitudes towards ambiguity and compound uncertainty are closely related. However, this association is much stronger when the second layer of uncertainty is subjective than when it is objective. Provided that the compound probabilities are simple enough, we find that most subjects, consisting of both students and policy makers, (1) reduce compound objective probabilities, (2) do not reduce compound subjective probabilities, and (3) are ambiguity non-neutral. By decomposing ambiguity into risk and model uncertainty, and jointly eliciting the attitudes individuals manifest towards these two types of uncertainty, we characterize individuals' degree of ambiguity aversion. Our data provides evidence of decreasing absolute ambiguity aversion and constant relative ambiguity aversion.

Loic Berger and Valentina Bosetti
Keywords: Ambiguity aversion, model uncertainty, reduction of compound lotteries, nonexpected utility, subjective probabilities, decreasing absolute ambiguity aversion
2016 - n° 575
This paper investigates the differential response of male and female voters to competitive persuasion in political campaigns. We implemented a survey experiment during the (mixed gender) electoral race for mayor in Milan (2011), and a field experiment during the (same gender) electoral race for mayor in Cava de' Tirreni (2015). In both cases, a sample of eligible voters was randomly divided into three groups. Two were exposed to either a positive or a negative campaign by one of the opponents. The third-control-group received no electoral information. In Milan, the campaigns were administered online and consisted of a bundle of advertising tools (videos, texts, slogans). In Cava de' Tirreni, we implemented a large scale door-to-door campaign in collaboration with one of the candidates, randomizing positive vs. negative messages. In both experiments, stark gender differences emerge. Females vote more for the opponent and less for the incumbent when they are exposed to the opponent's positive campaign. Exactly the opposite occurs for males. These gender differences cannot be accounted for by gender identification with the candidate, ideology, or other observable attributes of the voters.

Vincenzo Galasso and Tommaso Nannicini
Keywords: gender differences, political campaigns, randomized controlled trials, competitive persuasion
2016 - n° 574
In this article, we provide novel survey evidence on mid schoolers' awareness and ambiguity perceptions and on how such perceptions evolve during the process of high school track choice. Children in our study display partial awareness about the set of available tracks. Additionally, children report substantial belief ambiguity about their likelihood of a regular high school path, especially for lower-ranked tracks. Students start 8th grade with greater information about their favorite alternatives and continue to concentrate their search on the latter during the months before pre-enrollment. Children from less advantaged families display lower initial perceived knowledge and acquire information at a slower pace, particularly about college-preparatory schools.

Pamela Giustinelli and Nicola Pavoni
Keywords: Subjective Beliefs, Learning under Ambiguity and Limited Awareness, School Choice
2016 - n° 573
This paper provides a general framework for analyzing self-confirming policies. We study self-confirming equilibria in recurrent decision problems with incomplete information about the true stochastic model. We characterize stationary monetary policies in a linear-quadratic setting.

P. Battigalli, S. Cerreia-Vioglio, F. Maccheroni, M. Marinacci, T. Sargent
Keywords: Self-confirming equilibrium, partial identification, monetary policy
2016 - n° 572
We study the design of child care subsidies in an optimal welfare and tax problem. The optimal subsidy schedule is qualitatively similar to the existing US scheme. Efficiency mandates a subsidy on formal child care costs for working mothers, with higher subsidies paid to lower income earners. The optimal subsidy is also kinked as a function of child care expenditure.To counterbalance the sliding scale pattern of the optimal subsidy rates, marginal labor income tax rates are set lower than the labor wedges, with the potential to generate negative marginal tax rates. We calibrate our model to features of the US labor market and focus on single mothers with children aged below 6. The optimal program provides stronger participation incentives compared to the US scheme. The intensive margin incentives provided by the efficient program are milder, with subsidy rates decreasing with income more steeply than those in the US.

Christine Ho, Nicola Pavoni
Keywords: optimal taxation, asymmetric information, child care subsid ies
2016 - n° 571
This article provides an overview of long-term changes in the relative conditions of the rich in preindustrial Europe. It covers four pre-unification Italian states (Sabaudian State, Florentine State, Kingdom of Naples and Republic of Venice) as well as other areas of Europe (Low Countries, Catalonia) during the period 1300-1800. Three different kinds of indicators are measured systematically and combined in the analysis: headcount indexes, the share of the top rich, and richness indexes. Taken together, they suggest that overall, during the entirety of the early modern period the rich tended to become both more prevalent and more distanced from the other strata of society. The only period during which the opposite process took place was the late Middle Ages, following the Black Death epidemic of the mid-fourteenth century. In the period from ca. 1300 to 1800, the prevalence of the rich doubled. In the Sabaudian State, the Florentine State and the Kingdom of Naples, for which reconstructions of regional wealth distributions exist, in about the same period the share of the top 10% grew from 45-55% to 70-80% - reaching almost exactly the same level which has recently been suggested as the European average at 1810. Consequently, the time series presented here might be used to add about five centuries of wealth inequality trends to current debates on very long-term changes in the relative position of the rich.

Guido Alfani
Keywords: Economic inequality; wealth concentration; richness; top wealthy; middle ages; early modern period; Italy; Low Countries; Catalonia; Black Death; property structures
2016 - n° 570
In this paper we study alternative methods to construct a daily indicator of growth for the euro area. We aim for an indicator that (i) provides reliable predictions, (ii) can be easily updated at the daily frequency, (iii) gives interpretable signals, and (iv) it is linear. Using a large panel of daily and monthly data for the euro area we explore the performance of two classes of models: bridge and U-MIDAS models, and different forecast combination strategies. Forecasts obtained from U-MIDAS models, combined with the inverse MSE weights, best satisfy the required criteria.

Valentina Aprigliano, Claudia Foroni, Massimiliano Marcellino, Gianluigi Mazzi, Fabrizio Venditti
Keywords: Nowcasting, mixed-frequency data
2016 - n° 569
Do elderly workers retire early voluntarily, or are they induced (or even forced) by their employees? To establish the relevance of the labor demand component in retirement decisions, we consider a trade liberalization between Switzerland and the EU – the Mutual Recognition Agreement (MRA). A vast literature suggests that these trade liberalizations induce firms to relocate and to restructure, with large compositional effects on the labor market particularly for the elderly workers, who face higher mobility costs. Using Swiss Labor Force Survey data, we use a difference in differences approach to compareearly retirement behavior in three periods (pre-liberalization, announcement, and implementation) for three groups of industries. MRA industries represent our treatment group; control groups are non-MRA manufacturing industries, and services. Our empirical results show that elderly workers are more likely to retire early in the MRA sector during the announcement period, and that the employment of young (30-years old) male workers increases. The distribution of wages by age is instead unaffected. Additional empirical evidence using Swiss Business Census and UN Comtrade data suggests that the increase in early retirement in MRA is not explained by more firms' exits, nor by more early retirement among the exiting firms. It is rather the surviving MRA firms, which react to the increase in competition by adjusting their labor force and use more early retirement.
Piera Bello and Vincenzo Galasso
2016 - n° 568
We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibriumyields a higher surplus for most, but not all, parameter specifications.
Sarah Auster Piero Gottardi
2016 - n° 567
We propose a flexible Bayesian model averaging method to estimate a factor pricing model characterized by structural uncertainty and instability in factor loadings and idiosyncratic risks. We use such a framework to investigate key differences in the pricing mechanism that applies to residential vs. non-residential real estate investment trusts (REITs). An analysis of cross-sectional mispricings reveals no evidence of a pure hous- ing/residential real estate bubble inflating between 1999 and 2007, to subsequently burst. In fact, all REITs sectors record increasing alphas during this period, and show important differences in the dynamic evolution of risk factor exposures.

Daniele Bianchi, Massimo Guidolin, Francesco Ravazzolo
Keywords: I-CAPM, Mispricing, REIT, Model Uncertainty, Stochastic Breaks, Bayesian Econometrics
2015 - n° 566
Hansen and Richard (1987) prove a classic representation theorem for prices of payoffs in a conditional asset market. In this note we study the portfolio formation and portfolio pricing rules that ensure that the prices of payoffs generated by portfolios actually satisfy the assumptions of their representation theorem. In this way, we obtain a fundamental theorem of finance for conditional asset pricing.
Simone Cerreia-Vioglio, Fabio Maccheroni, Massimo Marinacci
2015 - n° 565
We develop a general equilibrium asset pricing model under incomplete information and rational learning in order to understand the unexplained predictability of option prices. In our model, the fundamental dividend growth rate is unknown and subject to breaks. Immediately after a break, there is insufficient information to price option contracts accurately. However, as new information arrives, a representative Bayesian agent recursively learns about the parameters of the process followed by fundamentals. We show that learning makes beliefs time-varying and generates predictability patterns across option contracts with different strike prices and maturities; as a result, the implied movements in the implied volatility surface resemble those observed empirically.

Alejandro Bernales and Massimo Guidolin
Keywords: option pricing, rational learning, Bayesian updating, implied volatility, predictability
2015 - n° 564
This paper explores the potential use of entertainment media programs for achieving development goals. I propose a simple framework for interpreting media effects that hinges on three channels: (i) information provision, (ii) role modeling and preference change, and (iii) time use. I then review the existing evidence on how exposure to commercial television and radio affects outcomes such as fertility preferences, gender norms, education, migration and social capital. I complement these individual country studies with cross-country evidence from Africa and with a more in-depth analysis for Nigeria, using the Demographic Health Surveys. I then consider the potential educational role of entertainment media, starting with a discussion of the psychological underpinnings and then reviewing recent rigorous evaluations of edutainment programs. I conclude by highlighting open questions and avenues for future research.
Eliana La Ferrara
2015 - n° 563
We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards.

Giacomo Rodano, Nicolas Serrano-Velarde, Emanuele Tarantino
Keywords: Credit Cycles; Financial Contracts; Credit Rationing; Real Activity
2015 - n° 562
We study the effects of a conventional monetary expansion, quantitative easing, and of the maturity extension program on corporate bond yields using impulse response functions to shocks obtained from flexible models with regimes. We construct weekly bond portfolios sorting individual bond trades by rating and maturity from TRACE. A standard single-state VAR model is inadequate to capture the dynamics of the data. On the contrary, under a three-state Markov switching model with time-homogeneous VAR coefficients, we find that unconventional policies may have been generally expected to decrease corporate yields. However, even though the sign of the responses is the one expected by policy-makers, the size of the estimated effects depends on the assumptions regarding the decline in long-term Treasury yields caused by unconventional policies, on which considerable uncertainty remains.

Massimo Guidolin, Alexei G. Orlov and Manuela Pedio
Keywords: Unconventional monetary policy, corporate bonds, term structure of Treasury yields, impulse response function, Markov swit ching vector autoregression
2015 - n° 561

We study monotone, continuous, and quasiconcave functionals defifined over an M-space. We show that if g is also Clarke-Rockafellar differentiable at (see below picture) , then the closure of Greenberg- Pierskalla differentials at x coincides with the closed cone generated by the Clarke-Rockafellar differentials at x. Under the same assumptions, we show that the set of normalized Greenberg-Pierskalla differentials at x coincides with the closure of the set of normalized Clarke-Rockafellar differentials at x. As a corollary, we obtain a differential characterization of quasiconcavity a la Arrow and Enthoven (1961) for Clarke-Rockafellar differentiable functions.

S. Cerreia-Vioglio, F. Maccheroni, and M. Marinacci
2015 - n° 560
A well functioning bureaucracy can promote prosperity, as advocated by Max Weber. But when bureaucracy gets jammed, it causes stagnation, as described by Franz Kafka. We propose a dynamic theory of the interaction between the production of laws and the efficiency of bureaucracy. When bureaucracy is inefficient the effects of politicians legislative acts are hard to assess. Therefore, incompetent politicians have strong incentives to pass laws to acquire the reputation of skill-full reformers. But too many, often contradictory reforms can in turn lead to a collapse in bureaucratic fficiency. This interaction leads to the existence of both Weberian and Kafkian steady states. A temporary surge in political instability, a strong pressure for reforms by the public, and the appointment of short-lived technocratic governments can determine a permanent shift towards the Kafkian nightmare steady state. Using micro-data for Italy, we provide evidence consistent with one key prediction of the theory: the relative supply of laws by incompetent politicians increases when legislatures are expected to be short.

Gabriele Gratton, Luigi Guiso, Claudio Michelacci and Massimo Morelli
2015 - n° 559
This paper studies how voters optimally allocate costly attention in a model of probabilistic voting. The equilibrium solves a modified social planning problem that reflects voters' choice of attention. Voters are more attentive when their stakes are higher, when their cost of information is lower and prior uncertainty is higher. We explore the implications of this in a variety of applications. In equilibrium, extremist voters are more influential and public goods are under-provided. The analysis also yields predictions about the equilibrium pattern of information, and about policy divergence by two opportunistic candidates. Endogenous attention can lead to multiple equilibria, explaining how poor voters in developing countries can be politically empowered by welfare programs.

Filip Matejka and Guido Tabellini
2015 - n° 558
This paper proposes and discusses an instrumental variable estimator that can be of particular relevance when many instruments are available and/or the number of instruments is large relative to the total number of observations. Intuition and recent work (see, e.g., Hahn (2002)) suggest that parsimonious devices used in the construction of the final instruments may provide eective estimation strategies. Shrinkage is a well known approach that promotes parsimony. We consider a new shrinkage 2SLS estimator. We derive a consistency result for this estimator under general conditions, and via Monte Carlo simulation show that this estimator has good potential for inference in small samples.

A. Carriero, G. Kapetanios, and M. Marcellino
Keywords: Instrumental Variable Estimation, 2SLS, Shrinkage, Bayesian Regression J
2015 - n° 557
The question of how economic inequality changed during the centuries leading up to the industrial revolution has been attracting a growing amount of research effort. Nevertheless, a complete picture of the tendencies in economic inequality throughout pre-industrial Europe has remained out of our grasp. This paper begins to resolve this problem by comparing long-term changes in inequality between Central and Northern Italy on the one hand and the Southern and Northern Low Countries on the other hand. Based on new archival material, we reconstruct regional estimates of economic inequality between 1500 and 1800 and analyze them in the light of the Little Divergence debate, assessing the role of economic growth, urbanization, proletarianization, and political institutions. We argue that different explanations should be invoked to understand the early modern growth of inequality throughout Europe, since several factors conspired to make for a society in which it was much easier for inequality to rise than to fall. We also argue that although there was apparently a 'Little Convergence' in inequality, at least some parts of southern and northern Europe diverged in terms of inequality extraction ratios.

Guido Alfani and Wouter Ryckbosch
Keywords: Economic inequality; early modern period; Sabaudian State; Florentine State; Italy; Low Countries; Belgium; The Netherlands; inequality extraction; wealth concentration; fiscal state; proletarianization
2015 - n° 556
The triplet-based risk analysis of Kaplan and Garrick (1981) is the keystone of state-of-the-art probabilistic risk assesment in several applied fields. This paper performs a sharp embedding of the elements of this framework into the one of formal decision theory, which is mainly con- cerned with the methodological and modelling issues of rational decision making. In order to show the applicability of such an embedding, we also explicitly develop it within a nuclear probabilistic risk assessment, as prescribed by the U.S. NRC. The aim of this exercise is twofold: on the one hand, it gives risk analysis a direct access to the rich toolbox that decision theory has developed, in the last decades, in order to deal with complex layers of uncertainty; on the other, it exposes decision theory to the challenges of risk analysis, thus providing it with broader scope and new stimuli.

E. Borgonovo, V. Cappelli, F. Maccheroni, M. Marinacci
2015 - n° 555
Government spending at the zero lower bound (ZLB) is not necessarily welfare enhancing, even when its output multiplier is large. We illustrate this point in the context of a standard New Keynesian model. In that model, when government spending provides direct utility to the household, its optimal level is at most 0.5- 1 percent of GDP for recessions of -4 percent; the numbers are higher for deeper recessions. When spending does not provide direct utility, it is generically welfare- detrimental: it should be kept unchanged at a long run-optimal value. These results are confirmed in a medium-scale DSGE version of the model featuring sticky wages and equilibrium unemployment.

Florin Bilbiie, Tommaso Monacelli, Roberto Perotti
Keywords: Government spending multiplier, zero lower bound, welfare
2015 - n° 554
This paper tests the commonly-used assumption that people apply a single discount rate to the utility from different sources of consumption. Using survey data from Uganda with both hypothetical and incentivized choices over different goods, we elicit time preferences from about 2,400 subjects. We reject the null of equal discount rates across goods; the average person in our sample is more impatient about sugar, meat and starchy plantains than about money and a list of other goods. We review theassumptions to recover discount rates from experimental choices for the case of goodspecific discounting. Consistently with the theoretical framework, we find convergence in discount rates across goods for two groups expected to engage in or think about arbitraging the rewards: traders and individuals with large quantities of the good at home. As an application, we evaluate empirically the conditions under which goodspecific discounting could predict a low-asset poverty trap.

Diego Ubfal
Keywords: time preferences, good-specific discounting, narrow-bracketing, selfcontrol problems, poverty traps
2015 - n° 553
We study decision problems in which the consequences of the alternative actions depend on states determined by a generative mechanism representing some natural or social phenomenon. Model uncertainty arises as decision makers may not know such mechanism. Two types of uncertainty result, a state uncertainty within models and a model uncertainty across them. We discuss some two-stage static decision criteria proposed in the literature that address state uncertainty in the first stage and model uncertainty in the second one (by considering subjective probabilities over models). We consider two approaches to the Ellsberg-type phenomena that these decision problems feature: a Bayesian approach based on the distinction between subjective attitudes toward the two kinds of uncertainty, and a non Bayesian one that permits multiple subjective probabilities. Several applications are used to illustrate concepts as they are introduced.

Massimo Marinacci
2015 - n° 552
We prove that a subtle but substantial bias exists in a standard measure of the conditional dependence of present outcomes on streaks of past outcomes in sequential data. The magnitude of this novel form of selection bias generally decreases as the sequence gets longer, but increases in streak length, and remains substantial for a range of sequence lengths often used in empirical work. The bias has important implications for the literature that investigates incorrect beliefs in sequential decision making - most notably the Hot Hand Fallacy and the Gambler's Fallacy. Upon correcting for the bias, the conclusions of prominent studies in the hot hand fallacy literature are reversed. The bias also provides a novel structural explanation for how belief in the law of small numbers can persist in the face of experience.

Joshua B. Miller and Adam Sanjurjo
Keywords: Law of Small Numbers; Alternation Bias; Negative Recency Bias; Gambler's Fallacy; Hot Hand Fallacy; Hot Hand Effect; Sequential Decision Making; Sequential Data; Selection Bias; Finite Sample Bias; Small Sample Bias
2015 - n° 551
We study optimal selling strategies of a seller who is poorly informed about the buyer's value for the object. When the maxmin seller only knows that the mean of the distribution of the buyer's valuations belongs to some interval then nature can keep him to payoff zero no matter how much information the seller has about the mean. However, when the seller has information about the mean and the variance, or the mean and the upper bound of the support, the seller optimally commits to a randomization over prices and obtains a strictly positive payoff. In such a case additional information about the mean and/or the variance affects his payoff.

Nenad Kos and Matthias Messner
Keywords: Optimal mechanism design, Robustness, Incentive compatibility, Individual rationality, Ambiguity aversion
2015 - n° 550
This paper proposes a Bayesian estimation framework for a typical multi-factor model with timevarying risk exposures to macroeconomic risk factors and corresponding premia to price U.S. publicly traded assets. The model assumes that risk exposures and idiosynchratic volatility follow a break-point latent process, allowing for changes at any point on time but not restricting them to change at all points. The empirical application to 40 years of U.S. data and 23 portfolios shows that the approach yields sensible results compared to previous two-step methods based on naive recursive estimation schemes, as well as a set of alternative model restrictions. A variance decomposition test shows that although most of the predictable variation comes from the market risk premium, a number of additional macroeconomic risks, including real output and inflation shocks, are significantly priced in the cross-section. A Bayes factor analysis massively favors of the proposed change-point model.

Daniele Bianchi, Massimo Guidolin and Francesco Ravazzolo
Keywords: Structural breaks, Stochastic volatility, Multi-factor linear models, Asset Pricing
2015 - n° 549
We characterize the consistency of a large class of nonexpected utility preferences (including mean-variance preferences and prospect theory preferences) with stochastic orders (for example, stochastic dominances of different degrees). Our characterization rests on a novel decision theoretic result that provides a behavioral interpretation of the set of all derivatives of the functional representing the decision maker's preferences. As an illustration, we consider in some detail prospect theory and choice-acclimating preferences, two popular models of reference dependence under risk, and we show the incompatibility of loss aversion with prudence.

Simone Cerreia Vioglio, Fabio Maccheroni, Massimo Marinacci
Keywords: Stochastic dominance, integral stochastic orders, nonexpected utility, risk aversion, multi-utility representation, prospect theory, choice-acclimating personal equilibria
2015 - n° 548
The hot hand fallacy refers to a belief in the atypical clustering of successes in sequential outcomes when there is none. It has long been considered a massive and widespread cognitive illusion with important implications in economics and finance. The strongest evidence in support of the fallacy remains that from the canonical domain of basketball, where the widespread belief in the existence of hot hand shooting, among expert players and coaches, has been found to have no evidential basis (Gilovich, Vallone, and Tversky 1985). A prominent exhibit of the fallacy is Koehler and Conley (2003)'s study of the NBA Three-Point Contest (1994-1997), a setting which is viewed as ideal for a test of the hot hand (Thaler and Sunstein 2008). In this setting, despite the well-known beliefs of players, coaches, and fans alike, Koehler and Conley find no evidence of hot hand shooting. In the present study, we collect 29 years of shooting data from television broadcasts of the NBA Three-Point Contest (1986-2015), and apply a statistical approach developed in Miller and Sanjurjo (2014), which is more powered, contains an improved set of statistical measures, and corrects for a substantial downward bias in previous estimates of the hot hand effect. In contrast with previous studies, but consistent with Miller and Sanjurjo (2014)'s recent finding of substantial hot hand shooting in all previous controlled shooting studies (including that from the original study of Gilovich, Vallone, and Tversky), we find substantial evidence of hot hand shooting in the NBA Three-Point Contest. This leaves little doubt that the hot hand not only exists, but actually occurs regularly. Thus, belief in the hot hand, in principle, is not a fallacy.

Joshua B. Miller and Adam Sanjurjo
Keywords: Hot Hand Fallacy; Hot Hand Effect
2015 - n° 547
Exploiting the timing of the 2005-2006 Italian bankruptcy law reforms, we disentangle the effects of reorganization and liquidation in bankruptcy on bank financing nd firm investment. A 2005 reform introduces reorganization procedures facilitating loan renegotiation. The 2006 reform subsequently strengthens creditor rights in liquidation. The first reform increases interest rates and reduces investment. The second reform reduces interest rates and spurs investment. Our results highlight the importance of identifying the distinct effects of liquidation and reorganization, as these procedures differently address the tension in bankruptcy law between the continuation of viable businesses and the preservation of repayment incentives.

Giacomo Rodano, Nicolas Serrano-Velarde, Emanuele Tarantino
Keywords: Financial Distress, Financial Contracting, Renegotiation, Multi-bank Borrowing, Bankruptcy Courts
2015 - n° 546
Severe economic downturns, characterized by deleverage, are typically preceeded by phenomena of debt overhang. This evidence suggests that large recessions may not be the result of large shocks, but, rather, of the interaction between typical shocks and the current state of the economy. We study the transmission of deleverage shocks in a stochastic economy with heterogeneous agents and occasionally binding collateral constraints, where debt evolves endogenously. Our key finding is that the impact effect of a deleverage shock on aggregate output is a non-linear, S-shaped, function of the accumulated level of debt. At low levels of debt, deleverage is almost neutral, whereas its negative impact is largely magnified when debt reaches a critical threshold, i.e., when financial fragility is sufficiently high. At this threshold, the constraint on borrowing becomes endogenously binding. However, when the level of debt is already high before the shock hits, the borrowers are constrained both ex-ante and ex-post. In this case, the effect on output of a deleverage shock is the highest, but, at the margin, roughly insensitive to the level of debt. This non-linearity is much more pronounced for deleverage shocks than for productivity shocks. Our results cast doubts on the accuracy of gauging the effects of financial disturbances in linearized, certainty-equivalence environments.

Marco Maffezzoli, Tommaso Monacelli
2015 - n° 545
We study the patterns of political selection in majoritarian versus proportional systems. Political parties face a trade-off in choosing the mix of high and low quality candidates: high quality candidates are valuable to the voters, and thus help to win the elections, but they crowd out the parties' most preferred loyal candidates. In majoritarian elections, the share of high quality politicians depends on the distribution of competitive versus safe (single-member) districts. Under proportional representation, politicians' selection depends on the share of swing voters in the entire electorate. We show that, as the share of competitive districts increases, the majoritarian system begins to dominate the proportional system in selecting high quality politicians. However, when the share of competitive districts becomes large enough, a non-linearity arises: the marginal (positive) effect of adding high quality politicians on the probability of winning the election is reduced, and proportional systems dominate even highly competitive majoritarian.

Vincenzo Galasso, Tommaso Nannicini
Keywords: electoral rules, political selection, probabilistic voting
2015 - n° 544
We consider real pre-Hilbert modules H on Archimedean f-algebras A with unit e. We provide conditions on A and H such that a Riesz representation theorem for bounded/continuous A-linear operators holds.

S. Cerreia Vioglio, F. Maccheroni, and M. Marinacci
2015 - n° 543

Does welfare improve when …firms are better informed about the state of the economy and can better coordinate their decisions? We address this question in an elementary business-cycle model that highlights how the dispersion of information can be the source of both nominal and real rigidity. Within this context we develop a taxonomy for how the social value of information depends on the two rigidities, on the sources of the business cycle, and on the conduct of monetary policy.
George-Marios Angeletos, Luigi Iovino, Jennifer Lao
Keywords: Fluctuations, informational frictions, strategic complementarity, coordination, beauty contests, central-bank transparency
2015 - n° 542
We analyze the effort allocation choices of incumbent politicians when voters are uncertain about politician preferences. There is a pervasive incentive to "posture" by overproviding effort to pursue divisive policies, even if all voters would strictly prefer to have a consensus policy implemented. As such, the desire of politicians to convince voters that their preferences are aligned with the majority of the electorate can lead them to choose strictly pareto dominated effort allocations. Transparency over the politicians' effort choices can either mitigate or re-enforce the distortions depending on the strength of politicians' office motivation and the capacity for the holder of the office in question to effect change. When re-election concerns are paramount transparency about effort choices can be bad for both incentivizing politicians to exert effort on socially efficient tasks and for allowing voters to select congruent politicians. We take our theoretical results to the data with an empirical analysis o f how U.S. Congressmen allocate time across issues. Consistent with the theory, we find evidence of political posturing due to elections (among U.S. Senators) and due to higher transparency (among U.S. House Members).

Elliott Ash, Massimo Morelli, Richard Van Weelden
Keywords: Posturing, Reputation, Transparency, Effort Allocation, Multi-task
2015 - n° 541
This paper applies mechanism design to the study of international conflict resolution. Standard mechanisms in which an arbitrator can enforce her decisions are usually not feasible because disputants are sovereign entities. Nevertheless, we find that this limitation is inconsequential. Despite only being capable of making unenforceable recommendations, mediators can be equally effective as arbitrators. By using recommendation strategies that do not reveal that one player is weak to a strong opponent, a mediator can effectively circumvent the unenforceability constraint. This is because these strategies make the strong player agree to recommendations that yield the same payoff as arbitration in expectation. This result relies on the capability of mediators to collect confidential information from the disputants, before making their recommendations. Simple protocols of unmediated communication cannot achieve the same level of ex ante welfare, as they preclude confidentiality.
Johannes Horner, Massimo Morelli, Francesco Squintani
2015 - n° 540
Existant studies of conflict, negotiation and international relations do not take into account that the institutions used to resolve disputes shape the incentives for entering disputes in the first place. Because engagement in a costly and destructive war is the 'punishment' for entering a dispute, institutions that reduce the chances that a dispute lead to open conflict may make more disputes emerge and incentivize militarization. We provide a simple model in which the support for unmediated peace talks, while effective in improving the chance of peace for a given distribution of military strength, ultimately leads to the emergence of more disputes and to higher conflict outbreak. Happily, we find that not all conflict resolution institutions suffer from these, apparently paradoxical, but actually quite intuitive drawbacks. We identify a form of third-party intervention inspired by the celebrated work by Myerson, and show that it can broker peace in emerged disputes effectively and also avoid perverse militarization incentives.
Adam Meirowitz, Massimo Morelli, Kristopher W. Ramsay, Francesco Squintani
2015 - n° 539
Frustration, anger, and blame have important consequences for economic and social behavior, concerning for example monopoly pricing, contracting, bargaining, violence, and politics. Drawing on insights from psychology, we develop a formal approach to exploring how frustration and anger, via blame and aggression, shape interaction and outcomes in strategic settings.

Pierpaolo Battigalli, Martin Dufwenberg, Alec Smith
Keywords: frustration, anger, blame, belief-dependent preferences, psychological games
2015 - n° 538
We develop, and experimentally test, models of informal agreements. Agents are assumed to be honest but suffer costs of overcoming temptations. We extend two classical bargaining solutions -split-the-difference and deal-me-out -to this informal agreement setting. For each solution there are two natural ways to do this, leaving us with 2x2 models to explore. In the experiment, a temptations-constrained version of deal-me-out emerges as the clear winner.
Martin Dufwenberg, Maros Servátka and Radovan Vadovic
2015 - n° 537
Understanding the dynamics of the leverage ratio is at the heart of the empirical research about firms' capital structure, as they can be very different under alternative theoretical models. The pillars of almost all empirical applications are the maintained assumptions of poolability and stationarity, which are motivated by the need of model's simplicity and treatability, rather than being based on an empirical ground. In this paper we provide robust evidence of non-stationarity for a significantly large share of US firms' debt ratios and of strong heterogeneity in the speeds at which firms adjust towards their targets. These results stimulate new directions of the empirical research on debt ratio dynamics by relying more on the concept of heterogeneous degree of leverage persistence.

Maria Elena Bontempi, Laura Bottazzi, and Roberto Golinelli
Keywords: Corporate finance; Heterogeneity of agents; Target leverage; Speed of adjustment; Unit roots and cointegration
2014 - n° 536
A common explanation for African current underdevelopment is the extractive character of institutions established during the colonial period. Yet, since colonial extraction is hard to quantify, its precise mecha- nisms and magnitude are still unclear. In this paper, I tackle these issues by focusing on colonial trade in French Africa. By using new data on export prices, I show that the colonizers used trade monopsonies and coercive labor institutions to reduce prices to African agricultural producers way below world market prices. As a consequence, during the colonial period, extractive institutions cut African gains from trade by at least one-half.

Federico Tadei
Keywords: Africa, Development, Institutions, Colonization, Trade, Labor Markets
2014 - n° 535
Motivated by dynamic asset pricing, we extend the dual pairs'theory of Dieudonne'(1942) and Mackey (1945) to pairs of modules over a Dedekind complete f-algebra with multiplicative unit. The main tools are:

a Hahn-Banach Theorem for modules of this kind;

a topology on the f-algebra that has the special feature of coinciding with the norm topology when the algebra is a Banach algebra and with the strong order topology of Filipovic, Kupper, and Vogelpoth (2009), when the algebra of all random variables on a probability space is considered.

As a leading example, we study in some detail the duality of conditional Lp-spaces.

S. Cerreia-Vioglio, M. Kupper, F. Maccheroni, M. Marinacci, N. Vogelpoth
Keywords: Dual pairs, Hahn-Banach Theorem for modules, complete L0-normed modules, automatic continuity
2014 - n° 534
How can laboratory experiments help us understand banking crises, including the usefulness of various policy responses? After giving a concise introduction to the field of experimental economics more generally, I attempt to provide answers. I discuss methodological issues and survey relevant work that has been done.

Martin Dufwenberg
Keywords: banking crises, lab experiments
2014 - n° 533
Because journals favor clear stories researchers' may gain by engaging in scientific misconduct, ranging from shady practices like running more sessions hoping for significance to outright data fabrication. To set researchers' incentives straight, we propose sealed-envelope submissions, where editors' and referees' evaluations are based only on the interest of the research question and on the proposed empirical method.

Martin Dufwenberg and Peter Martinsson
2014 - n° 532
We introduce imperfect information in stock prices determination. Agents receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices include a transitory 'noise bubble' which can be responsible for boom andbust episodes unrelated to economic fundamentals. We propose a non-standard VAR procedure to estimate impulse response functions to noise shock and the bubble component of stock prices. Noise explains a large fraction of US stock prices. The dot-com bubble is explained by noise. The 2007 stock price boom is not a bubble, whereas the following stock market crisis is due to negative noise shocks.

Mario Forni, Luca Gambetti, Marco Lippi, Luca Sala
Keywords: Rational bubbles, structural VARs, noise shocks
2014 - n° 531
We investigate the role of 'noise' shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for quite a sizable fraction of their prediction error variance at business cycle horizons.

Mario Forni, Luca Gambetti, Marco Lippi, Luca Sala
Keywords: Nonfundamentalness, SVAR, Imperfect Information, News, Noise, Business cycles
2014 - n° 530
We build a model of a limit order book and examine the consequences of adding a dark pool. Starting with an illiquid book, we show that book and consolidated fill rates and volume increase, but the spread widens, depth declines and welfare deteriorates. When book liquidity increases, more orders migrate to the dark pool and large traders'welfare improves; but while the spread-increase is dampened, the depth-reduction is amplified and small traders are still worse off. All effects are stronger for a continuous than for a periodic dark pool and when the tick size is large.
Sabrina Buti, Barbara Rindi, Ingrid M. Werner
2014 - n° 529
IIf citizens of different countries belonging to an economic union adhere to different and deeply rooted cultural norms, when these countries interact their leaders may find it impossible to agree on efficient policies, especially in hard times. Political leaders' actions are bound to express policies that do not violate these norms. This paper provides a simple positive theory and a compelling case study of the importance of cultural clashes when economies integrate, as well as a normative argument about the desirability of institutional integration. Namely, we argue that a political union, with a common institutions and enforcement of rules, is a solution which is most beneficial the greater is cultural diversity in an economic union.

Luigi Guiso, Helios Herrera, Massimo Morelli
Keywords: Cultural Norms, Institutions, Crisis Mismanagement
2014 - n° 528
In deciding whether to join a coalition or not, an agent must consider both i) the expected power of the coalition and ii) her position in the vertical structure within the coalition. We establish the existence of a positive relationship between the degree of inequality in remuneration across ranks within coalitions and the number of coalitions to be formed endogenously in stable systems. An inherent feature of such coalitions is that they are mixed and balanced, rather than segregated, in terms of members abilities. When the surplus of a coalition is assumed to be linear in its relative power conditional on its size, we also establish the existence of stable systems and characterise them fully: a system is stable if and only if all coalitions are of an ecient size and every agent is paid her marginal contribution.

Massimo Morelli and In-Uck Park
Keywords: Stable systems, Abilities, Hierarchy, Cyclic partition
2014 - n° 527
We consider a decision maker who ranks actions according to the smooth ambiguity criterion of Klibanoff et al. (2005). An action is justifiable if it is a best reply to some belief over probabilistic models. We show that higher ambiguity aversion expands the set of justifiable actions. In turn, this implies that higher ambiguity aversion expands the set of rationalizable actions of a game. Our results follow from a generalization of the duality lemma of Wald (1949) and Pearce (1984).

P. Battigalli, S. Cerreia-Vioglio, F. Maccheroni, M. Marinacci
2014 - n° 526
We analyze political selection in a closed list proportional system where parties have strong gate-keeping power, which they use as an instrument to pursue votes. Parties face a trade-off between selecting loyal candidates or experts, who are highly valued by the voters and thus increase the probability of winning the election. Voters can be rational or behavioral. The former care about the quality mix of the elected candidates in the winning party, and hence about the ordering on the party list. The latter only concentrate on the quality type of the candidates in the top positions of the party list. Our theoretical model shows that to persuade rational voters parties optimally allocate loyalists to safe seats and experts to uncertain positions. Persuading behavioral voters instead requires to position the experts visibly on top of the electoral list. Our empirical analysis, which uses data from the 2013 National election in Italy-held under closed list proportional representation-and from independent pre-electoral polls, is overall supportive of voters' rational behavior. Loyalists (i.e., party officers or former members of Parliament who mostly voted along party lines) are overrepresented in safe positions, and, within both safe and uncertain positions, they are ranked higher in the list.

Vincenzo Galasso and Tommaso Nannicini
Keywords: political selection, electoral rule, closed party lists
2014 - n° 525
Paul Krugman has written a very timely paper. It discusses an old issue, that has become very relevant again. My comments address two questions. First, should inflation targeting be reconsidered? Here my answer is a clear and resounding yes. Inflation targeting performed very well in the fight against inflation and in stabilizing inflation expectations. But now, even leaving issues of financial stability aside, monetary policy is faced with different challenges. Second, which features of the inflation targeting framework should be changed? Here I argue that other aspects of the framework are more important than the numerical value of the target. In addressing these questions, I review Paul Krugman's arguments, agreeing with many but not all of them.

Guido Tabellini
2014 - n° 524
The problemof choosing an optimal toolkit day after day,when there is uncertainty concerning the value of different tools that can only be resolved by carrying the tools, is a multi-armed bandit problem with nonindependent arms. Accordingly, except for very simple specifications, this optimization problem cannot (practically) be solved. Decision takers facing this problem presumably resort to decision heuristics, "sensible" rules fordeciding which tools to carry, based on past experience. In this paper, we examine and compare the performance of a variety of heuristics, some very simple and others inspired by the computer-science literature on these problems. Some asymptotic results are obtained, especially concerning the long-run outcomes of using the heuristics, hence these results indicate which heuristics do well when the discount factor is close to one. But our focus is on the relative performance of these heuristics for discount factors bounded away from one, which we study through simulation of the heur istics on a collection of test problems.

Alejandro Francetich and David M. Kreps
2014 - n° 523
Recent applications to the modeling of emission permit markets by means of stochastic dynamic general equilibrium models look into the relative merits of different policy mechanisms under uncertainty. The approach taken in these studies is to assume the existence of an emission constraints that is always binding (i.e. the emission cap is always smaller than what actual emissions would be in the absence of climate policy). Although this might seem a reasonable assumption in the longer term, as policies will be increasingly stringent, in the short run there might be instances where this assumption is in sharp contrast with reality. A notable example would be the current status of the European Emission Trading Scheme. This paper explores the implications of adopting a technique that allows occasionally, rather than strictly, binding constraints. With this new setup the paper sets out to investigate the relative merits of different climate policy instruments under different macro-economic shocks.

Valentina Bosetti and Marco Maffezzoli
Keywords: Dynamic Stochastic General Equilibrium model, emission trading, carbon tax, occasionally binding constraints
2014 - n° 522
Previous research has documented a behavioral distinction between 'social risk' and financial risk. For example, individuals tend to demand a premium on the objective probability of a favorable outcome when that outcome is determined by a human being instead of a randomizing device (Bohnet, Greig, Herrmann, and Zeckhauser 2008; Bohnet and Zeckhauser 2004). In this paper we ask whether social risk is always aversive, answering in the negative and identifying factors that can eliminate, or even change the sign of, the social risk premium. Motivated by the stereotype content model from the social psychology literature, which we argue has straightforward predictions for situations involving social risk (Fiske, Cuddy, and Glick 2007), we focus on two factors: 'warmth', synonymous with intent, and 'competence.' We investigate these factors using a between-subjects experimental design that implements slight modifications of the binary trust game of Bohnet and Zeckhauser across treatments. Our results indicate that h aving risk generated by another human being does not, on its own, lead to a social risk premium. Instead, we find that a positive risk premium is demanded when a counter-party has interests conflicting with one's own (low warmth) and, additionally, is competent. We find a negative social risk premium -i.e., social risk seeking- when the counter-party has contrary interests but lacks competence.

Jeffrey V. Butler and Joshua B. Miller
Keywords: Social Risk, Social Perception, Intention, Betrayal Aversion, Trust
2014 - n° 521
Reciprocity can be a powerful motivation for human behaviour. Scholars argue that it is relevant in the context of private provision of public goods. We examine whether reciprocity can resolve the associated coordination problem. The interaction of reciprocity with cost-sharing is critical. Neither cost-sharing nor reciprocity in isolation can solve the problem, but together they have that potential. We introduce new network notions of reciprocity relations to better understand this. Our analysis uncovers an intricate web of nuances that demonstrate the attainable yet elusive nature of a unique outcome.
Martin Dufwenberg and Amrish Patel
Keywords: Discrete public good, participation, reciprocity networks, coordination, cost-sharing
2014 - n° 520

Maccheroni, Marinacci, and Rustichini [17], in an Anscombe-Aumann framework, axiomatically characterize preferences that are represented by the variational utility functional where u is a utility function on outcomes and c is an index of uncertainty aversion. In this paper, for a given variational preference, we study the class of functions c that represent V. Inter alia, we show that this set is fully characterized by a minimal and a maximal element, c* and d*. The function c*, also identified by Maccheroni, Marinacci, and Rustichini [17], fully characterizes the decision maker's attitude toward uncertainty, while the novel function d* characterizes the uncertainty perceived by the decision maker.

S. Cerreia-Vioglio, F. Maccheroni, M. Marinacci, and A. Rustichini
2014 - n° 519
Land conflicts in developing countries are costly. An important policy goal is to create respect for borders. This often involves mandatory, expensive interventions. We propose a new policy design, which in theory promotes neighborly relations at low cost. A salient feature is the option to by-pass regulation through consensus. The key idea combines the insight that social preferences transform social dilemmas into coordination problems with the logic of forward induction. As a first, low-cost pass at empirical evaluation, we conduct an experiment among farmers in the Ethiopian highlands, a region exhibiting features typical of countries where borders are often disputed. Our results suggest that a low-cost land delimitation based on neighborly recognition of borders could deliver a desired low-conflict situation if accompanied by an optional higher cost demarcation process.

Martin Dufwenberg, Gunnar Köhlin, Peter Martinsson, Haileselassie Medhin
Keywords: Conflict, land-conflict game, social preferences, forward induction, Ethiopia, experiment, land reform
2014 - n° 518
The hot hand fallacy has long been considered a massive and widespread cognitive illusion with important economic consequences. While the canonical domain of the fallacy is basketball, which continues to provide its strongest and most readily generalizable supporting evidence, the fallacy has been considered as a candidate explanation for various economic and financial anomalies. We find, in its canonical domain, that the belief in the hot hand is not a fallacy, and that, surprisingly, the original evidence supports this conclusion. Our approach is to design a controlled shooting field experiment and develop statistical measures that together have superior identifying power over previous studies. We find substantial evidence of the hot hand, both in our study and in all extant controlled shooting studies, including the seminal study (which found the opposite result, and coined the term ''the hot hand fallacy''). Also, we observe the hot hand effect to be heterogeneous across shooters, which suggests that decision makers (e.g. players and coaches) may have incentive to identify which shooters have a greater tendency to become hot. Accordingly, we find evidence that expert players (teammates) can do so. In light of these results, we reconsider the economic relevance of the hot hand fallacy more generally.

Joshua B. Miller and Adam Sanjurjo
Keywords: Hot Hand Fallacy; Hot Hand Effect
2014 - n° 517
Does democracy make politicians accountable? The UK expenses scandal of May 2009 constitutes an ideal setting to answer this question, since it allows credible ceteris paribus comparisons. We show that scandal-related press coverage significantly increased the probability of an MP to retire, reduced vote shares of standing MPs, but did not decrease their re-election probability. We also show that punishment was directed to individual MPs involved in the scandal rather than their parties. An objective monetary measure of malfeasance from an official report explains press coverage but has no independent effect on MPs' retirement or vote shares. We show that voters perceive co-partisan MPs to be less involved than other MPs. Finally we analyse coverage of the scandal by seven national newspapers and conclude that the press worked as a watchdog by focussing on the government and on frontbenchers of the main opposition party, with little role for ideological leanings. Our study also uncovers a substantial gender bias: ceteris paribus, female MPs received more media attention and, for the same level of media attention, were more likely to stand down.
Valentino Larcinese and Indraneel Sircar
2014 - n° 516
A decision maker can experiment on up to two alternatives simultaneously over time. One and only one of these alternatives can produce successes, according to a Poisson process with known arrival rate; but there is uncertainty as to which alternative is the profitable one. The decision maker only observes the outcomes of the alternatives chosen, and choosing each alternative entails a cost. Simultaneous experimentation involves higher costs but can produce more data. At the same time, since the alternatives are negatively correlated, the outcomes of either one are informative about the other. If the costs are high and she is sufficiently impatient, the decision maker never experiments on both alternatives at once. Otherwise, if she starts with a single alternative that produces no successes, she becomes gradually pessimistic and eventually takes on the other alternative while keeping the first one - despite the higher costs and the negative correlation.

Alejandro Francetich
Keywords: Experimentation, two-armed bandits, multi-choice bandits, negatively correlated
2014 - n° 515
A model of 'harassment bribes,' paid for services one is entitled to, is developed to analyze
the proposal to legalize paying these bribes while increasing fines on accepting them.
We explore performance as regards corruption deterrence and public service provision. Costs of verifying reports make the scheme more effective against larger bribes and where institutions' quality is higher. A modified scheme, where immunity is conditional on reporting, addresses some key objections. The mechanism works better against more distortionary forms of corruption than harassment bribes, provided monetary rewards can compensate bribers for losing the object of the corrupt exchange. Results highlight strong complementarities with policies aimed at improving independence and accountability of law enforcers.

Martin Dufwenberg, Giancarlo Spagnolo
Keywords: Bribes, Corruption, Immunity, Law enforcement, Leniency, Whistleblowers
2014 - n° 514
A decision maker faces an unobserved state of nature. She updates her prior on the state based on the realizations of a signal. In this note, we show that the expected posterior on any given state, taking expectation under the conditional distribution of the signal on this same state, is never lower than the prior on said state. In other words, the expected posterior probability on the true state is never lower than the prior on this state, regardless of what the true state is.

Alejandro Francetich and David Kreps
2014 - n° 513
This paper is the first attempt, to the best of our knowledge, to study the impact of a carbon tax by means of a heterogeneous agents model. The objectives of the paper are two: i) To assess how the results of a representative agent model compare to those coming from a model accounting for heterogeneity across agents when evaluating aggregate economic and environmental impacts of a carbon tax; ii) To assess the distributional implications of a carbon tax and how they can be mitigated through different recycling schemes. We find that heterogeneous agents models may deliver different results from those derived using a representative agent model, the main tool used to guide policy making so far. In particular, we find evidence of a double dividend for several recycling schemes and carbon taxes as high as 20% of the energy price. In addition, we find the potential for redistributive channels related to carbon policies that can only be appreciated applying this type of modeling.

Valentina Bosetti and Marco Maffezzoli
2014 - n° 512
What are the political consequences of introducing de jure political equality? Does it change
patterns of political representation and the identity of elected legislators? This paper uses an important electoral reform passed in 1912 in Italy to provide evidence on these questions. The reform trebled the electorate (from slightly less than three million to 8.650.000) leaving electoral rules and district boundaries unchanged. By exploiting differences in enfranchisement rates across electoral districts we identify the effect of franchise extension on various political outcomes. Enfranchisement increased the vote share of left-wing social reformers but had no impact on their parliamentary representation, no impact on parliamentary representation of aristocracy and traditional elites and no effect on political competition. We show that left-wing parties decreased their vote shares and were systematically defeated in key swing districts. We document elite's effort to minimize the political impact of the reform and, in particular, we show that the Vatican's secret involvement in the post-reform electoral campaign had a substantial impact on voting results, although formerly and newly enfranchised voters were equally affected. We relate our results to economic theories of democratization, which appear to be only partially compatible with our evidence.

Valentino Larcinese
Keywords: democratization, voting, electoral competition, inequality, swing districts, political violence, Vatican, socialism
2014 - n° 511
We provide evidence on whether providing university students with feedback on their past
exam performance affects their future exam performance. Our identification strategy exploits a natural experiment in a leading UK university where different departments have historically
different rules on the provision of feedback to their students. We find the provision of feedback has a positive effect on students' subsequent test scores: the mean impact corresponds to 13% of a standard deviation in test scores. The impact of feedback is stronger for more able students and for students who have less information to start with about the academic environment, while no subset of individuals is found to be discouraged by feedback. Our findings suggest that students have imperfect information on how their effort translates into test scores and that the provision of feedback might be a cost effective means to increase students' exam performance.

Oriana Bandiera, Valentino Larcinese and Imran Rasul
Keywords: feedback, incentives, students' performance, university education
2014 - n° 510
We analyze the value of information in the market for corporate control. The raider and the shareholders are privately and imperfectly informed about the post-takeover value of the firm. We show that public information provision reduces the dispersion of the shareholders' beliefs resulting in a transfer of surplus from the raider to the shareholders. What is more, if the raider is privately informed all his private information is revealed through the price offer, hence he prefers not to acquire private information, provided that the shareholders do not engage in information acquisition. The target shareholders, on the other hand, have incentives to acquire information-solicit a fairness opinion-after the raider makes a price offer. However, when both parties have access to an information market, they both have incentives to acquire information.

Mehmet Ekmekci and Nenad Kos
Keywords: takeovers, fairness opinion, tender offers, lemons problem, large shareholder
2014 - n° 509
We view economic time series as the result of a cascade of shocks occurring at different times and different frequencies (scales). We suggest that economic relations that are found to be elusive when using raw data may hold true for different layers (details) in the cascade of economic shocks. This observation leads to a notion of a scale-specific predictability. Using direct extraction of the details and two-way aggregation, we provide strong evidence of risk compensations in market returns, as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets, at frequencies lower than the business cycle.

Federico M. Bandi, Bernard Perron, Andrea Tamoni, and Claudio Tebaldi
Keywords: long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis
2014 - n° 508
The paper aims to analyze the effects of plague on the long-term development of Italian cities, with particular attention to the 1629-30 epidemic. By using a new dataset on plague mortality rates in 49 cities covering the period 1575-1700 ca., an economic geography model verifying the existence of multiple equilibria is estimated. It is found that cities affected only by the 1629-30 plague recovered in the short run, whereas cities affected by both the 1575-77 and 1629-30 epidemic show persistent decline in the long run. This new finding contrasts with previous literature and is hence interpreted in the light of the new concept of "urban frailty".

Guido Alfani and Marco Percoco
Keywords: Plague, Italian cities, Urban development, Urban demography, Multiple