Working papers results

2010 - n° 374
Trafficking of persons is a serious and very complex issue, although too often neglected, in many developing countries, including the Philippines. We make a first attempt to produce empirical research from the angle of development economists to assess the risk factors for entering into trafficking and evaluate the prospects of reintegration of trafficked victims. We have interviewed young women resident in shelters in the Cebu area and the sample consists of girls 14 years and above living in 12 shelters in the Cebu area. We find that trafficked victims have on average lower levels of education than the non-trafficked girls. Trafficking victims are also more likely to come from larger families. 20 percent of the girls came from households where the mother was absent during the last year she lived with her family. Therefore, as expected, income appears as a main factor of vulnerability. Any policy oriented to create safety nets for families at risk, empowering women, and create better labor opportunities for girls is likely to reduce to probabilities of entering into trafficking. In terms of family dynamics, trafficking victims come from families with relatively more inter-personal conflicts. There is also more prevalence of physical violence in houses where trafficked victims lived. The violent home environment of these vulnerable girls needs to be kept in mind when designing reintegration programs. Using techniques that elicit the expectations that the girls had when leaving their household and then comparing them with what actually happened, we observe that trafficked girls underestimate the cost of leaving the household (in terms of likelihood to get pregnant, ill, use drugs) and overestimate the benefits (in terms of likelihood to marry a foreign man and being able to send back money to the family). Moreover, we also find that friends are the most prevalent mode of recruitment of trafficking while the role of formal recruiters is less important. In our sample, only 27 percent of the girls obtained their job via a recruiter. Information campaigns to explain the danger of the jobs offered could contribute to stopping the trafficking phenomenon. Finally, important insights emerged by looking at inter-temporal preferences and risk preferences of our respondents, where these preferences were elicited using the tools of experimental economics. Former victims of trafficking exhibited a relatively high degree of impatience compared to other girls. On the other hand, both groups were extremely risk averse. These results suggests that an important role should be given, when designing reintegration programs for vulnerable girls – and especially former victims of trafficking – in working on the formation of their expectation, inter-temporal preferences and risk preferences.
Elsa Artadi, Martina Bjorkman, and Eliana La Ferrara
2010 - n° 373
We derive the analogue of the classic Arrow-Pratt approximation of the certainty equivalent under model uncertainty as defined by the smooth model of decision making under ambiguity of Klibanoff, Marinacci and Mukerji (2005). We study its scope via a portfolio allocation exercise that delivers a tractable mean-variance model adjusted for model uncertainty. In a problem with a risk-free asset, a risky asset, and an ambiguous asset, we find that portfolio rebalancing in response to higher model uncertainty only depends on the ambiguous asset's alpha, setting the performance of the risky asset as benchmark. In addition, the portfolios recommended by our model are not systematically conservative on the share held in the ambiguous asset: indeed, in general, it is not true that greater ambiguity reduces the optimal demand for the ambiguous asset. The analytical tractability of the enhanced Arrow-Pratt approximation renders our model especially well suited for calibration exercises aimed at exploring the consequences of ambiguity aversion on equilibrium asset prices.

'Crises feed uncertainty. And uncertainty affects behaviour, which feeds the crisis.'
Olivier Blanchard, The Economist, January 29, 2009

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Fabio Maccheroni, Massimo Marinacci and Doriana Ruffino
2010 - n° 372
This paper presents a new model of occupational licensing, where producers are heterogeneous both in their ability or productivity and in the level of the barriers to entry in the profession that they face. The model bears important implications on the effects of liberalization policies that differ dramatically from those implied by the standard model, where heterogeneity is unidimensional in productivity. Specifically, we find that liberalization policies induce higher quality of services if barriers to entry are high for the most able agents. The opposite if such a correlation is low. We test these implications using detailed microdata on Italian lawyers and find a strong effect of the 2006 Italian liberalizing reform on the composition of the outflows from the legal profession. While higher ability lawyers are more likely to leave the profession before the reform, the opposite happens in its aftermaths, consistently with the idea that monopoly power selects high-productivity lawyers out of the profession.

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Michele Pellizzari and Giovanni Pica
2010 - n° 371
We model a dynamic financial market where traders submit orders either to a limit order book (LOB) or to a Dark Pool (DP). We show that there is a positive liquidity externality in the DP, that orders migrate from the LOB to the DP, but that overall trading volume increases when a DP is introduced. We also demonstrate that DP market share is higher when LOB depth is high, when LOB spread is narrow, when the tick size is large and when traders seek protection from price impact. Further, while inside quoted depth in the LOB always decreases when a DP is introduced, quoted spreads can narrow for liquid stocks and widen for illiquid ones. We also show that traders' interaction with both LOB and DP generates interesting systematic patterns in order ‡ow: dierently from Parlour (1998), the probability of a continuation is greater than that of a reversal only for liquid stocks. In addition, when depth decreases on one side of LOB, liquidity is drained from DP. When a DP is added to a LOB, total welfare as well as institutional traders' welfare increase but only for liquid stocks; retail traders' welfare instead always decreases. Finally, when flash orders provide select traders with information about the state of the DP, we show that more orders migrate from the LOB to the DP, and DP welfare effects are enhanced.

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Sabrina Buti, Barbara Rindi,and Ingrid M. Werner
2010 - n° 370
A characteristic function-based method is proposed to estimate the time-changed Levy models, which take into account both stochastic volatility and infinite-activity jumps. The method facilitates computation and overcomes problems related to the discretization error and to the non-tractable probability density. Estimation results and option pricing performance indicate that the infiniteactivity model performs better than the finite-activity one. By introducing a jump component in the volatility process, a double-jump model is also investigated.

Junye Lia, Carlo Favero and Fulvio Ortu
Keywords: Empirical characteristic function; Stochastic volatility; Infinite-activity jumps; Option pricing; Continuous GMM
2010 - n° 369
Why do people have kids in developed societies? We propose an empirical test of two economic theories of fertility - children as "consumption" or "investment" good. We use as a natural experiment the Italian pension reforms of the 90s, which by decreasing expected pension benefits generated a large negative income effect, with a sharp discontinuity across workers. This policy experiment is particularly well suited, since lower future pensions are expected to have differential effects on fertility under the "consumption" and 'investment' theories. Empirical analyses identify a causal, robust positive effect of less generous future pensions on postreform fertility. These findings are consistent with an "old-age security" motive also for contemporary fertility in advanced societies or with the original Becker- Lewis (1973) version of the "consumption" theory, based on the interaction between quantity and quality of children.

Francesco Billari and Vincenzo Galasso
Keywords: old-age security, quantity-quality trade-off, public pension systems,
2010 - n° 368
Is electoral competition good for political selection? To address this issue, we introduce a theoretical model where ideological parties select and allocate high-valence (experts) and lowvalence (party loyalists) candidates into electoral districts. Voters care about a national policy (e.g., party ideology) and the valence of their district's candidates. High-valence candidates are more costly for the parties to recruit. We show that parties compete by selecting and allocating good politicians to the most contestable districts. Empirical evidence on Italian members of parliament confirms this prediction: politicians with higher ex-ante quality, measured by years of schooling, previous market income, and local government experience, are more likely to run in contestable districts. Indeed, despite being different on average, politicians belonging to opposite political coalitions converge to high-quality levels in close electoral races. Furthermore, politicians elected in contestable districts make fewer absences in parliament, due to a selection effect more than to reelection incentives.

Vincenzo Galasso and Tommaso Nannicini
Keywords: political competition, political selection, probabilistic voting•
2010 - n° 367
The term structure of the stock market risk, defined as the per period conditional variance of cumulative returns, is measured in the strategic asset allocation literature (e.g. Campbell and Viceira (2002), (2005)) via multi-step ahead predictions from a VAR model of the joint process for one-period returns and their predictor, the dividend-price ratio. In this paper we modify the dynamic dividend growth model to allow for a time varying linearization point driven by the age structure of population. This specification leads to a decomposition of the dividend-price prices into an high volatility little persistence noise component, and a low volatility high persistence information component. The dividend-price ratio is mean reverting toward the time-varying mean and its deviations from it have a predicting power for returns that increases with the horizon. As a result of these two effects, the forward solution of the model delivers a negative sloping term structure of stock market risk. Direct regressions of returns at different horizons on the relevant predictors are much better suited to capture this feature than VAR based multi-period iterated forecasts. This evidence is very little affected by parameters' uncertainty and is robust to the existence of "imperfect predictiors", as a parsimoniuos parameterization is very precisely estimated and no-projections for future variables are needed in the direct regression approach.

Carlo A. Favero and Andrea Tamoni
Keywords: multiperiod iterated forecasts, direct regressions, stock marketrisk, demographics•
2010 - n° 366
We establish integral representation results for suitably pointwise continuous and comonotonic additive functionals of bounded variation defined on Stone lattices.

2000 Mathematics Subject Classification: Primary 28A12, 28A25, 46G12; Secondary 91B06


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Simone Cerreia-Vioglio, Fabio Maccheroni, Massimo Marinacci and Luigi Montrucchio
2010 - n° 365
We use a standard quantitative business cycle model with nominal price and wage rigidities to estimate two measures of economic inefficiency in recent U.S. data: the output gap - the gap between the actual and effcient levels of output - and the labor wedge|the wedge between households' marginal rate of substitution and firms' marginal product of labor. We establish three results. (i ) The output gap and the labor wedge are closely related, suggesting that most inefficiencies in output are due to the inecient allocation of labor. (ii ) The estimates are sensitive to the structural interpretation of shocks to the labor market, which is ambiguous in the model. (iii ) Movements in hours worked are essentially exogenous, directly driven by labor market shocks, whereas wage rigidities generate a markup of the real wage over the marginal rate of substitution that is acyclical. We conclude that the model fails in two important respects: it does not give clear guidance concerning the effciency of business cycle fluctuations, and it provides an unsatisfactory explanation of labor market and business cycle dynamics.

Luca Sala, Ulf Soderstrom and Antonella Trigari
Keywords: Business cycles, Efficiency, Labor markets, Monetary Policy
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