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The 2016 Nobel Prize in Economics and how to ensure kids do their chores

October 19, 2016

As any child promised a weekly allowance in return for chore completion can tell you: details matter. When does the trash need to be taken out? What counts as a completely made bed? What happens if someone else makes a mess after that area has been cleaned? The parent wants the chores completed well and timely while the child wants to achieve sufficiency for her weekly candy money. All of these questions that immediately race through the mind of our young adolescent form, little to her knowledge, the basics of contract theory.

These frictions between parent and child, the insurer and the insured, the employer and the employee, and almost any professional relationship between two or more agents, provide the research area of the winners of the 2016 Nobel Prize in economic sciences. Doctors Oliver Hart and Bengt Holmström, both of whom are current members of the BGSE Scientific Council, were awarded the prize for their work focusing on the trade-offs in setting contract terms earlier this week.

The central question plaguing contracts is not what specific form they should take, as there seem to be an infinite number of qualifications even a simple chore contract might inspire, but rather how to regulate the behavior of the agents involved. Applying our example to the case of the firm and its workers, it is clear the firm desires excellent work from the employee, and the employee seeks to know exactly what constitutes the work needed to earn the incentive.

Dr. Holmström’s research on performance-based pay of management and executives directly considers this. His findings suggest pay should be tethered to measures such as company share performance relative to that of direct competitors as opposed to the more commonplace linking to share price alone. Further, his analysis of the insurance market sought to bridge the gap between insurance providers and their clients. Despite the more optimal state of the individuals purchasing full insurance, co-payments still exist. This is because insurers are seeking to disincentivize costly, unnecessary doctor trips. In essence: how can the parent avoid being taken advantage of and how much should our young teenager be paid for her household work?

The work of Dr. Hart attempts to resolve the infinite questions regarding how our teenager can warrant the weekly allowance or how workers will earn their salary. Rather than laboriously delineate every potential scenario a worker may face and how they should respond, Dr. Hart would suggest decision rights be pre-determined amongst agents. This would allow unilateral decisions through a pre-agreed framework to be made when frictions arise. Additionally, the granting of ownership rights, contends Dr. Hart, greatly alters agent behavior. The ice-cream shop manager granted an ownership stake is ostensibly more motivated to work hard. On the other hand, cutting costs by purchasing lower quality ice-cream ingredients might accomplish the same goal at the expense of the shop’s reputation. The important takeaway from the research is that how the rights of ownership and decision-making are divided greatly affects the behavior of actors.

The duo may not have completely quieted all the concerns of the parent or child in the chore contract (or in any of the infinitely many contracts that span our daily lives). However, they have provided a framework to better understand relationships between the agents represented in these little documents so fundamental to society.

You can also read about the 2016 Nobel Prize recipients on the BGSE main website.

Markets or organisations? UPF guest lecture by Robert Gibbons

October 10, 2016


Image source: UPF

If an alien came to earth from outer space wearing glasses that show organizations in pink, and markets in green, what would it see? Would it see more green, and describe our activities on earth as a market economy, or more pink, pointing to an organizational economy? What systematic differences would it notice between underlying circumstances that give rise to green systems, and circumstances that give rise to pink, and would the quality of the outcomes differ for markets and organizations? Finally, would the alien be able to give any advice on how to improve outcomes where we try to solve problems by means of organizations?

Read more…

Vaccine-preventable Childhood Disease and Adult Human Capital Evidence from the 1967 Measles Eradication Campaign in the United States

October 3, 2016

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Philipp Barteska, Sonja Dobkowitz, Maarit Olkkola, Michael Rieser, Pengfei Zhao

Master’s Program:



Measles is currently one of the leading causes of death for young children worldwide. We analyze the impact of measles prevention on later-life human capital outcomes by taking advantage of a measles eradication campaign implemented in 1967 in the United States. We provide evidence with a difference-in-differences design from the 2000 US census micro-sample for the following statistically significant results: the campaign increased completed years of schooling by two weeks, the probability of completing high school by 0.32 per cent and decreased the probability of being unemployed by 4.26 per cent. Due to the exogenous timing of the eradication campaign, we argue that these results can be interpreted causally. To the best of our knowledge our paper is the first one to document adult human capital impacts of early-life measles exposure using a natural experiment.


Figure 1: Yearly Cases of Measles in the United States

Empirical strategy:

The 1967 measles eradication campaign led to an unprecedented drop in reported measles exposure in the US, as depicted in figure 1.

Our empirical strategy uses the fact that there is variation in measles exposure between states prior to the eradication campaign: the decrease in incidence is highest in those states with the highest incidence rates, as depicted in the first stage relationship in figure 2. This allows for a difference-in-differences design, exploring whether the states that had higher prior exposure to the disease gained more in human capital outcomes than the states with less exposure, controlling for pre-existing state-level linear time trends and state fixed-effects among other controls.


Figure 2: Decline 1966-1970

We also perform placebo interventions to test the robustness of our results. As depicted in figure 3, the only positive and statistically significant impacts are found for 1967, the actual intervention year. This lends more support to the causal interpretation of our results.


Figure 3: Placebo Interventions Around Cutoff


In this paper we show suggestive evidence that exposure to a previously common childhood disease can have negative impacts on educational attainment in adulthood, although the effect sizes are not large. This finding strengthens the literature on the early-life origins of human capital.

Our results are for the most part relevant for developing countries, many of which have not yet achieved the vaccination levels required for herd immunity. Furthermore, the possible connection between the institutional framework and the returns to health interventions contributes to understanding the distinct determinants of human capital development.
Full project available here

Data sources:

IPUMS-USA, University of Minnesota,

Project Tycho, University of Pittsburgh,

Aspirations and Academic Achievement: The Spillover Effects of Beca 18 on Educational Outcomes of Younger Students

September 26, 2016

Beca 18 Peru

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program. Photo: PRONABEC

Elena CostarelliRosamaría Dasso Arana, Bárbara Sparrow Alcázar

Master’s Program:


Using administrative data from the Ministry of Education in Peru, we analyze the effect of being near a Beca 18 beneficiary -a new scholarship program for high school students- on the academic achievement of second grade children. Previous literature suggests that information about the potential returns to education plays an important role on students’ achievement. Our hypothesis is that having a fellow nearby might change the perception of younger children and of their parents about returns to education, thus leading them to invest more on it. We use a difference in difference approach to test this hypothesis in a school panel data setting. As we are interested in the effect of information transmission, we use GPS location data to identify which schools are near a Beca 18 beneficiary. We test for several distance specifications with consistent results. Our findings suggest a positive spillover effect of the program on younger children in both reading and math performance.


Access to tertiary education is a well-known motivation for students to perform better at school. Good students are usually the ones that are able to attend better universities which in turn allows them to improve their living conditions. This is true in most developed countries, where access to good quality higher education is a possibility for most students. However, in the case of many developing countries, market failures and government limitations do not allow students to consider this possibility.

When facing the decision of educating their children, many families may consider it to be an unprofitable investment. Little information about the benefits of education in terms of higher future income and the lack of success stories among people close to them may all contribute to this perception. In this regard, the impact of a program that makes access to tertiary education may possibly affect the way people value education in a significant way. If parents and children are aware that been a good student may have a tangible future reward, their investment decisions may change.

Access to tertiary education is greatly limited to children from poor families in Peru. To address this issue, the Peruvian government recently created the Beca 18 program. Beca 18 is a merit/need based scholarship program that targets students applying to higher education institutions such as universities and technical institutes. The program gives selected students the opportunity of attending the best tertiary schools in the country. Before the program existed, even access to public universities was very limited. Beca 18 can be considered as one of the first real opportunities for children of low resources in Peru to access high quality tertiary education.

Current literature suggests that there is a positive relationship between policies that increase the perceived returns of education and educational outcomes among children. There is also evidence that supports that future access to scholarships and merit based programs may encourage better school performance. In this paper, we will analyze the impact of Beca 18 on the school performance of second grade children. To do this, we use test score data from the Ministry of Education and administrative records from the Beca 18 program. Using a difference in difference approach, we were able to identify a positive impact of being near a program beneficiary on both math and reading proficiency outcomes. 


Our results suggest that the Beca 18 program has relevant spillover effects on the educational outcomes of younger children. Guided by our conceptual framework, we would expect this result to be a consequence of the fact that children and parents exposed to Beca 18 beneficiaries update their information about perceived returns to education, leading them to invest more time and resources in obtaining better educational results.

We also find that effects on math test scores are stronger and more robust to several specifications than effects on reading test scores. This result is consistent with findings of other studies suggesting that math scores are more quickly affected by changes in study behavior. We also find that the effect of being near a beneficiary decreases as the distance to the school of the beneficiary increases. This result is consistent with our hypothesis that the improvements in educational outcomes are a result of information transmission.

Another result worth discussing is that we found that the effect of the program is larger when the number of beneficiaries nearby increases. This suggests that investment decisions are affected by how likely it is to get the scholarship. It may also suggest that the investment decision may vary if there are more people acting as role models.

Overall, our results are relevant from a policy perspective. We present evidence that the program has relevant spillover effects that should be considered when evaluating its benefits. As public programs in Peru are under continuous scrutiny, further evidence that supports the program’s effectiveness is of greatly useful to ensure its continuity. Also, as our results suggest that the number of beneficiaries matter for investment decisions, the expansion of the program could lead to even greater spillover effects.

It is still important to note that the effects found here are not the main intended effects of Beca 18: the scholarship program was designed as a supply side policy intervention. Our findings support the idea that this program can have important demand side effects worth considering. We would also expect for these effects to increase over time: the success stories of current beneficiaries in the labor market could lead to an even greater increase of the expected returns of education.


Pulling together or tearing apart? Ethnic heterogeneity, natural shocks and common pool resources in rural Malawi

September 21, 2016


Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Andrea Bacilieri, Abhijeet Khanna, Irene Pañeda FernandezJonathan Stern

Master’s Program:


This paper examines how ethnic heterogeneity may affect the ability of Malawian rural households to solve collective action problems. The collective action challenges are natural shocks -floods, droughts, and irregular rain and availability of common pool resources – an irrigation system, a forest, and common pasture land. We measure household welfare through maize harvest and annual consumption. We find that ethnic polarization and fractionalization are unambiguously bad for maize harvest but, under natural shocks, the size of this negative relationship is reduced. This may be due to the way natural shocks cross ethnic lines and facilitate the overcoming of ethnic differences. The bad effects of polarization remain unchanged in the presence of a shock, suggesting that this is a more intransigent problem. With respect to consumption, we find diminishing returns to increased polarization, becoming negative for high levels of polarization. Results are strongest in the presence of a communal forest. This may be due to the repeated and continuous nature of communal forest management, and the way that polarization may facilitate the formation of coherent bargaining factions.



In this paper we explore the effects of ethnic fractionalization and polarization in the presence of natural shocks and common pool resources. By greater fractionalization we mean a smaller probability that any two individuals come from the same ethnic group.  Polarization is a related concept which also takes into account the size of the bargaining factions- polarization being highest with two equally sized groups.

Our hypotheses were that ethnic heterogeneity would worsen the impact of shocks, and affect detrimentally the economic benefit derived from common pool resources. We sought to test these hypotheses by constructing a novel dataset for Malawi which combines indices of ethnic fractionalization and polarization calculated at the Territorial Authority level using the 2008 census and the Malawi Integrated Household Panel Survey for the year 2013. We argue for the exogeneity of our heterogeneity indices based on the low level of change in the ethnic makeup of Malawi over the past four years and the low level of migration within the country.

In the first part of our analysis we regress the log of maize harvest on the presence of shocks such as drought,  flood and irregular rain interacted with our ethnic heterogeneity indices and a set of agricultural, climate, household and community controls. We find that ethnic polarization and fractionalization are unambigiously bad for maize harvest. Counter to our expectations, we find that fractionalization appears to lessen the impact of a drought or irregular rain on harvest, although the net effect of increases in fractionalization remains bad for harvests. We posit tentatively that the reduction in the effect of  fractionalization in the presence of a shock could be due to the way natural shocks may cross ethnic lines and facilitate the overcoming of ethnic diff erences. The bad effects of polarization remain unchanged in the presence of a shock, suggesting that this is a more intransigent problem, and potentially a cause of enduring local level conflict.

In the second part of our analysis we regress the log of consumption on the presence of common pool resources such as forests, irrigation systems and common pasture land. We find no signicant relationship between consumption and fractionalization after testing both linear and quadratic specications. For polarization we find a quadratic relationship with consumption, which is strongest in the presence of a communal forest. This suggests that a certain degree of polarization could help communal forest management, with diminishing returns to increased polarization, becoming negative for high levels of polarization. We posit that this may be due to the repeated and continuous nature of communal forest management, and the way that polarization may facilitate the formation of coherent bargaining factions.

Through an exploration of the correlations between our ethnic heterogeneity indices and a set of community characteristics we find that greater  heterogeneity is negatively correlated with school quality and the availability of agricultural inputs. These results cast some doubt on the exogeneity of ethnic heterogeneity. However given that the ethnic indices are slow moving over time, these correlations may also suggest some of the mechanisms by which fractionalization and polarization aff ect economic development in rural Malawi. Further work might seek to explore further these mechanisms, and whether the empirical findings of this paper can be replicated in other countries and contexts.

Price parity in two-sided markets: a new perspective

September 13, 2016

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Sara Del Vecchio, César Ulate

Master’s Program:

Competition and Market Regulation

Paper Abstract:

Online platforms are believed to be beneficial to consumers in a number of ways. They facilitate consumers’ search and comparison, which in turn fosters competition between sellers. They drive the so called long tail effect that increases the variety of products offered, improving the consumer’s ability to find the right match for their needs. Platforms might adopt some particular measures aimed at protecting their profits, and potentially the viability of their business model. In the past few years, many online platforms have been under the scrutiny of various competition authorities regarding a particular clause they include in their contracts with sellers commonly called ’price parity clause’ or more specifically Across Platform Parity Agreement (APPA), this limits the seller’s ability to set lower prices (or better conditions) on other sale channels. At face value, price parity seems like a restriction on sellers’ pricing abilities which benefits consumers, as they can enjoy increased value service at apparently no additional cost.

We build a stylized model and we show that platforms can increase welfare and have pro-competitive effects, while price parity clauses are generally harmful for consumers surplus and welfare, nevertheless they can be good if they are indispensable for the platform viability.


The price parity clause included in platforms’ contracts with sellers, can be categorized as narrow or wide according to the scope of the price limitation. As illustrated in the figure below a ‘narrow APPA’ (the purple rectangular in the figure) refers to a clause where the seller is restricted from charging a lower price on their direct channel. By contrast, a ’wide APPA’ (the orange rectangular in the figure) is when the seller is limited from setting a lower price not only on their own website but also on any other competing platform. This will allow the platform to make claims, such as the ’best price guarantee’ as shown in the figure.


Narrow & Wide Across-Platform Parity Agreements

Online platforms often argue that they need to include this constraint on seller’s price, otherwise consumers would just free ride on the platform services, and then complete the transaction on the seller’s own website which offers a lower price. At the same time, such clause in the seller-platform contract might generate anticompetitive effects, In particular, they may raise costs for sellers, which in turn are reflected into higher prices for consumers. Sellers pay a fee to intermediaries, which are insulated from competitive pressure due to the price parity clause itself.

Indeed, in the past few years many online intermediaries have been under the scrutiny of various competition authorities regarding APPAs that they were including in their contracts with sellers. There have been several cases across the world related to this clause, starting from the Apple eBook case in 2013, until the recent series of investigations in Europe regarding the online travel agent

In particular, the case shows some inconsistencies in the decisions across Europe, in most of the countries (including UK, France, Italy and Sweden), settled by agreeing to allow online travel agents, to offer lower room rates via’s competitors, by dropping its wide APPA, restoring competition between online travel agencies. The commitments do allow to retain its narrow APPA for prices and booking conditions, ensuring hotels offer the same rates and conditions that are provided on their own direct website. In Germany, instead, the Bundeskartellamt decided also to prohibit the narrow APPA. Nevertheless, in France they recently passed a Law (la Loi Macron) whereby they made APPAs illegal per se, with the aim of liberalising the economy and boosting growth. Furthermore, would be desirable more guidance on how to set out the most appropriate theory of harm in order to have convergence at European level in relation to these clauses.

Modeling Approach:

In this paper we build a stylised model with three different types of rational agents: (i) sellers, (ii) platforms and (iii) consumers. They all take sequential decisions in an infinitely repeated game. We include different search costs for consumers depending on the channel used to search and purchase a product. We focus only on pure strategies that lead to a particular Sub-Game Perfect Nash Equilibrium (SPNE) where all agents participate. We compare this SPNE across different scenarios: from the setting where there is a monopoly platforms, to the setting where we have competing platforms. We look at the equilibrium prices and welfare that arise in each of these scenarios with and without narrow and wide APPAs. Finally, we compare it to the counter-factual where no platform operates in the market.

Findings and Conclusion:

In terms of policy approach towards these clauses, our findings are in line with great part of the literature with respect to wide APPAs. Our model suggests that under no condition this clause can have pro-competitive effects, therefore the current European move towards a prohibition seems economically sound and sensible. With regards to narrow APPAs, instead, we believe the current call in many European countries for an outright ban could be detrimental for welfare, as it overlooks the benefits that platforms bring to the market. Indeed, we find that under some conditions these clauses despite limiting competition, do lead to efficiencies that the authorities should take into account.

We conclude that the existence of a platform is in general good, because as a first order effect it increases the number of transactions and reduces search costs for consumers. However, we find that prices will only be lower if there is effective competition between platforms. Furthermore, if the platform is not able to recover its costs though sales, then the viability of the platform may depend on the existence of the APPA. Hence, as shown the narrow APPA decreases welfare unless it is indispensable for the platform to operate.

Monetary policy effects on inequality: A country state-level analysis for the United States

September 6, 2016

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2016. The project is a required component of every master program.

Carola Ebert, Sigurdur Olafson, and Hannah Pfarr

Master’s Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Our project focuses on the assessment of a potential relationship between monetary policy actions and economic inequality in form of the Gini index. The analysis is conducted for the United States on a country- as well as on a state-level. Lack of quality and comparability of inequality data is a major empirical challenge in the research on inequality in general. Thus, we use different methodology for the data on the Gini index to ensure the robustness of the main results on the country level. Moreover, the main contribution of this work is the analysis on a more dis-aggregated level, i.e. the state level and a regional level. The state- and region- level analysis provide a further line of investigation with respect to the relationship between monetary policy and inequality. When considering monetary policy effects on inequality on an aggregated country level, one cannot be sure whether potentially heterogeneous reactions of inequality within the country are washed away by the aggregation over states. Therefore, this paper does not only analyse the relation between monetary policy and inequality on the aggregate country level, but also on the state level. Furthermore, as a first step in the direction of investigating potential transmission channels of monetary policy into inequality, further tests with regards to the initial wealth levels across states are conducted.

Main Conclusion:

In this paper we analyzed the implication of a monetary policy shock for inequality on a country-level, regional-level and (on a) state-level (as well). The results are largely consistent across different model specifications and considering different geographic levels, implying that a contractionary monetary policy shock seems to raise inequality on impact. Although the effect is small, it is consistently positive across states and regions. Already the fact that we find that there is an effect of monetary policy on inequality is a contribution in itself.


Our benchmark model using OLS leads to the conclusion that a contractionary monetary policy shock leads to an increase of inequality. This finding holds for richer as well as poorer states. The contemporaneous impact stays positive over the considered time horizon. We have run several robustness checks using different model specification for OLS as well as a VAR approach. These checks have confirmed the earlier findings.



However, we have stressed that there is room for further investigation to shed light in this area.One potential way to go would be to expand the analysis by using alternative inequality measures. We conducted our analyses using the Theil and Atkinson indices obtained from Frank’s website. However, since the results obtained by using these two measures do not add anything to the analysis, we have not included them in the paper.

Furthermore, some authors stress the relevance of the top income and low income distribution when analyzing the effects of inequality. Therefore, one might think about controlling for the share of top incomes within the states to asses to what extent the reaction to monetary policy would change. We already tried capturing parts of these potential dynamics using the simple mean comparison tests for wealth dependence.

We find evidence that (seems to) suggest that monetary policy has a stronger impact on wealthy states and regions compared to poorer states and regions. Those results are obtained using simple mean-comparison tests and should be viewed as preliminary, as further research on the issue is necessary to concretely conclude whether the initial wealth-level of states and regions is relevant for the transmission mechanism from monetary policy on inequality.

After our results show that there is an effect of monetary policy on inequality, the next step in this line of research could be the investigation of the actual transmission mechanism. One could include a more elaborate analysis of the potential channels through which monetary policy affects inequality.

As a last remark, we want to point out that we were originally interested in investigating this topic for the European Monetary Union member states. This, however, is not possible due to data limitations. Firstly, across European countries there is no uniform definition and measurement of inequality. Secondly, the monetary union is fairly new and the data of a unitary monetary policy shock would be too short to conduct our analysis. Nevertheless, we do believe this is an interesting path for future research and, as pointed out in the literature review, the finding of a robust relationship between monetary policy and inequality backs this claim.