Working papers results

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.

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.

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.

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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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.

Recent developments in endogenous growth theory suggest fertility decline in the context of the demographic transition was crucial for achieving long-term growth, and that it was triggered by forces eminently economic in nature. It is then somewhat puzzling that France, which was not as industrialised as other parts of Europe, lead that decline. Taking advantage of the considerable internal heterogeneity, this paper looks within France for some answers. Using dpartement level data for the last quarter of the nineteenth century, it studies the correlates of fertility estimating a 2SLS fixed-effects model. Results confirm the importance of some of the forces suggested by standard fertility choice models. Nevertheless, certain non-economic factors (such as secularisation) -for which I provide new measurements- also explain part of the variation. Spatial dependence turns out as well to be significant in all specifications of the model, suggesting some sort of diffusion was indeed taking place.

This paper brings the French case into the current debate on Malthusian dynamics in early modern times. In particular, it studies the long-term evolution of aggregate variables, showing that nineteenth century France was hardly a Malthusian world in a strict sense. Homeostasis was maintained throughout the century and there were signs of a strong positive check, but if there was some sort of preventive check, this was not 'written in stone'. The results of both cointegrated VAR and short-run analysis grant a reading where departure from the Malthusian world (if there ever was one) is due to a secular change in the relationship between income, marriages, and births. If this interpretation is correct, the fertility decline was instrumental in the sustained decline in mortalit1y during the century.

Differences in college enrollment rates between poor and rich students are a prevalent phenomenon, but particularly striking in Latin America. The literature suggests explanations such as differences in "college preparedness" on the one hand, in that poor students lack skills that enable them to benefit from college, and "credit constraints" on the other hand. One explanation that has been neglected in this analysis consists of differences in information sets between the poor and the rich - for example about career opportunities-translating into different perceptions of individual returns to college. Data on people's subjective expectations of returns allow to take this factor into account and to directly address the following identification problem: conditional on their information sets poor people might expect low returns and thus decide not to attend. Or they might face high (unobserved) costs that prevent them from attending de-spite high expected returns. Conventional approaches rely on strong assumptions about people's information sets and about how they form expectations to address this identification problem.

Data on people's subjective expectations of returns as well as on their schooling decisions allow me to directly estimate and compare cost distributions of poor and rich individuals. I find that poor individuals require significantly higher expected returns to be induced to attend college, implying that they face higher costs than individuals with wealthy parents. I then test predictions of a model of college attendance choice in the presence of credit constraints, using parental income and wealth as a proxy for the household's (unobserved) interest rate. I find that poor individuals with high expected returns are particularly responsive to changes in direct costs, which is consistent with credit constraints playing an important role. Evaluating potential welfare implications by applying the Local Instrumental Variables approach of Heckman and Vytlacil (2005) to my model, I find that a sizeable fraction of poor individuals would change their decision in response to a reduction in direct costs. Individuals at the margin have expected returns that are as high or higher than the individuals already attending college, suggesting that government policies such as fellowship programs could lead to large welfare gains.

The currently available empirical evidence shows remarkable differences between various estimates of the effects on U.S output of an exogenous shift in Federal tax liabilities. Shocks identified via the narrative method, imply a multiplier of about three over . an horizon of three years. Tax shocks identified in fiscal VAR models deliver a much smaller multipier of about one. Is this heterogeneity real, or is it simply the result of different approaches to the identification of exogenous shifts in taxes? Or of different specifications of the empirical model used to estimate the tax multiplier? In this paper we reconcile this apparently contradictory evidence by showing that the large multiplier obtained via the narrative identification methods are generated by the choice of a limited information approach in their estimation and not by the different nature of the shocks. Using the shocks identified by a Narrative methods in a multivariate dynamic model delivers estimates of the tax multiplier very much in line with those obtained in the traditional fiscal VAR approach.

This paper documents the existence of a slowly evolving trend in the dividendprice ratio, dpt , determined by a demographic variable, MY : the middle-aged to young ratio. Deviations of dpt from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY and dpt is a prediction of an overlapping generation model. The joint significance of MY and dpt in longhorizon forecasting regressions for market returns explain the mixed evidence on the ability of dpt to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.