Can adjustment costs of intangible capital explain the decline in the labor share?

Economics master project by Pierre Coster, Pia Ennuschat, Raquel Lorenzo, Giacomo Stazi, and Robert Wojciechowski ’20

Two tiny figurines of construction workers stand on an asphalt road

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Abstract

Labor share, once thought to be a constant, has experienced a secular decline in many developed economies. We investigate whether adjustment costs to intangible capital can be used to explain this trend. We develop a simple partial equilibrium model with a profit maximizing firm that produces using a three factor CES production function and faces convex adjustment costs to intangible capital. We find an intuitive expression for the steady state labor share as a function of parameters and the steady state level of investment in intangible capital.

We then run simulations to better understand the behaviour of the labor share in our model. Somewhat surprisingly, we find that adjustment costs do not affect the steady state labor share for any given elasticity of substitution. However, their presence creates a strong relationship between the labor share and the elasticity of substitution. We also find a number of short-run dynamics that are affected by the level of adjustment costs.

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Labor share trends over the last 60 years in the United States. Source: AMECO

Conclusions

We find that our model with adjustment costs leads to a very clear relationship between the elasticity of substitution and the labor share. Therefore, one could use it to explain the secular decline in the labor share as a result of a falling elasticity of substitution in presence of convex adjustment costs to intangible capital. However, in our simple model there does not appear to be a meaningful relationship between the level of convex adjustment and the steady state labor share. Moreover, adjustment costs affect a number of interesting short-run dynamics. The level of adjustment costs changes the responsiveness of the labor share to variations in the price of inputs. Lastly in our simple model the volatility of the price process does not alter the steady state labor share, even though it does matter for short-run dynamics.

We see room for further research in the following directions. Our analysis assumes perfectly competitive markets. A model of monopolistic competition in the goods market could lead to long-run effects of the level of adjustment costs on the labor share. Karabarbounis and Neiman, 2013 showed that in such a model price decreases can explain part of the decrease in the labor share. Therefore, analysing the effect of adjustment costs in the context of monopolistic competition seems promising. Another potential avenue is the generalization of the analysis to a general equilibrium setting.

Understanding endogenous changes in wages that were set to be fixed throughout our analysis, could be important in explaining the changes in the labor share.

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About the Barcelona GSE Master’s Program in Economics

Broadstreet: a blog for inter-disciplinary conversation about Historical Political Economy

Vicky Fouka ’10 (Economics) is an editor of this new meeting point for HPE researchers

A map shows the original location of the Broad Street Pump

About the project

Broadstreet is a blog dedicated to the study of historical political economy (HPE). Its goal is to foster conversations across disciplines in the social sciences, namely economics and political science, but also history, sociology, quantitative methods, and public policy. Correspondingly, its editors (and guest contributors) are drawn from these respective disciplines. 

Given the boundaries that typically exist across academic disciplines, scholars who work on similar subjects – like HPE – rarely talk to one another or read each other’s work. Our hope in starting Broadstreet is to break down some of these artificial boundaries, generate true cross-disciplinary dialogues, and produce better and more wide-ranging HPE research.

The blog’s name, Broadstreet, is a nod to the legendary John Snow and his study of the 1854 cholera outbreak in London. Snow found convincing evidence for a previously unproven water-born theory of cholera transmission, with a rigorous yet interdisciplinary approach — using detailed socio-economic data, ethnography, historical patterns of disease transmission, and early techniques of causal inference. The Broad Street water pump in London’s Soho district was not only a meeting place for the diverse residents of the neighborhood, but served as the focal point for Snow’s interdisciplinary breakthrough. While the Broad Street pump is no more, the legacy of this innovative research lives on. We hope that Broadstreet will be go-to location for all those with interests in HPE.

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Vicky Fouka ’10 (Economics) is Assistant Professor of Political Science at Stanford University. She is an alum of the Barcelona GSE Master’s in Economics and earned her PhD in Economics at GPEFM (UPF and Barcelona GSE).

Check out her most recent post on Broadstreet, “The Great Northward Migration and Social Transformation, Part I” which looks at the mass exodus of more than 5 million Black Americans from the Southern United States between 1915 and 1970.

Eliciting preferences for truth-telling in a survey of politicians

Publication in PNAS by Katharina Janezic ’16 (Economics) and Aina Gallego (IBEI and IPEG)

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Honesty is one of the most valued traits in politicians. Yet, because lies often remain undiscovered, it is difficult to study if some politicians are more honest than others. This paper examines which individual characteristics are correlated with truth-telling in a controlled setting in a large sample of politicians. We designed and embedded a game that incentivizes lying with a non-monetary method in a survey answered by 816 Spanish mayors. Mayors were first asked how interested they were in obtaining a detailed report about the survey results, and at the end of the survey, they had to flip a coin to find out whether they would be sent the report. Because the probability of heads is known, we can estimate the proportion of mayors who lied to obtain the report.

We find that a large and statistically significant proportion of mayors lied. Mayors that are members of the two major political parties lied significantly more. We further find that women and men were equally likely to lie. Finally, we find a negative relationship between truth-telling and reelection in the next municipal elections, which suggests that dishonesty might help politicians survive in office.

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6 Real Policy Solutions to the U.S. Mental Health Crisis

Article by Patricia Paskov ’18 (Economics) on Medium

image: piranka / Getty Images

In a post on Medium’s Elemental, Patricia Paskov outlines six mental health policy recommendations for the United States during Covid-19 and beyond:

  • Destigmatize mental health
  • Widen accessibility of mental health care
  • Break down barriers to telehealth care
  • Strengthen labor policies for low-skilled workers
  • Build a body of rigorous data and research
  • Harness artificial intelligence and predictive analytics

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Patricia Paskov ’18 is an Impact Evaluation Analyst at The World Bank. She is an alum of the Barcelona GSE Master’s in Economics.

The Impact of the Sharing Economy on Housing Rental Prices: The Case of Airbnb in Barcelona

Economics master project by Marc Agustí, Magnus Asmundsson, Christof Bischofberger, Pablo de Llanos, Alberto Font, and Lucía Kazarian ’20

Source: Airbnb

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Peer-to-peer home-sharing platforms such as Airbnb are a new phenomenon which many researchers consider to be responsible for significant disruptions in the housing market. Prior to the introduction of these platforms into the rental market, hotels were the primary supplier of short-term rentals, while residential properties almost exclusively operated on the long-term rental market. The introduction of short-term rental platforms like Airbnb, allows homeowners to choose either to supply on the short-term or the long-term rental markets. As a result, when residential properties are moved to the short-term rental market, the quantity of housing supplied on the long-term rental market decreases, inducing an upward pressure on long-term rents.

In our paper, we offer a novel approach to investigate the extent to which the expansion of the sharing economy is responsible for increases in long-term rents and prices on the housing market. To this end, we construct a theoretical framework for the housing market that allows for spillover effects between neighborhoods, and other local externalities caused by tourism. The model allows for the short-term housing market devoted to tourism to impact both long-term rental rates and housing prices. Using a panel of quarterly data on newly signed rental contracts and transaction prices in Barcelona from 2015-Q2 to 2018-Q4, we implement a fixed-effects spatial 2SLS method allowing for endogeneity in the variable which measures the presence of Airbnb.

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Airbnb listings in Barcelona (2018-Q2)

Barcelona, which hosts the sixth largest concentration of Airbnb listings in the world, serves as a prime case study to investigate these effects because our dataset covers growth rates in contractual rental rates, transaction prices and the number of active Airbnb listings of 27.42%, 27.41% and 29.38%, respectively.

Key results

The theoretical model predicts that a change in the level of Airbnb activity might affect both long-term rents and housing prices. In fact, if negative externalities generated by tourists are sufficiently small, Airbnb leads to increases in long-term rental prices. Yet, these effects ultimately depend on the values of parameters such as the size of the stock of housing units and the level of externalities emerging from tourism. In addition, the model bears upon the effects of Airbnb on gentrification and displacement: we find that for a positive increase in the negative externalities generated by tourism, the proportion of homeowners renting in the short-term market will increase. As the degree to which residents are harmed by negative externalities increases, more of them will decide to abandon their neighborhood, reducing the local demand for long-term housing. As a result, rents will suffer a downward pressure, increasing the relative profitability of the short-term rental market for homeowners. Besides, this effect will be aggravated if the degree of inter-neighborhood dependence generated by externalities is high. Residents will be prone to move to other neighborhoods in which not only the presence of Airbnb is low, but also in which the penetration of this marketplace is low in the surrounding areas.

We refer to this process as Airbnb-induced gentrification. Similarly, if the profitability of renting a property on Airbnb increases, a similar process as the one we have just described above would arise, which would also lead to gentrification.

For another thing, our main empirical results show that Airbnb positively and significantly affects rents, even when accounting for spatial dependence and inter-neighborhood spillovers. In a given neighborhood (as classified in this paper), for every additional 100 Airbnb listings, rents increase by an average of 2.1% when indirect spillovers coming from adjacent neighborhoods are included. In particular, the direct effect of Airbnb within a given neighborhood accounts for much of this effect: the own-neighborhood effect is to induce a 1.7% increase in rents. The maximum average indirect effect found in the sample data accounts for 35% of the total effect. The implications of these findings are far reaching and suggest that spillover effects can indeed explain a large portion of rent increases. Likewise, we identify a potential bias in the previous literature in that the total effect is falsely interpreted as the direct effect, thereby misinterpreting the direct effect of Airbnb on long-term rents.

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Empirical Results: Main Impact Measures

In contrast, our empirical results show that Airbnb has had no significant effect on transaction prices. The most plausible explanation for the non-significant results for prices is that homeowners do not believe that Airbnb is sustainable in the long-run, and therefore they do not adjust their predicted future cash flows when valuing their properties.

Finally, we believe that future research could delve into more detailed theoretical models, especially with respect to the price setting by homeowners in light of the establishment of Airbnb. Additionally, we think that making a distinction between direct and indirect neighborhood effects is vital in order to truly understand the dynamics of the housing markets, especially in the growing metropoles. Accordingly, we encourage scholars to further apply and develop spatial econometric methods that measure indirect spillover effects in studies related to housing markets.

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About the Barcelona GSE Master’s Program in Economics

Industrial Robots and Where to Find Them: Evidence and Theory on Derobotization

Economics master project by Amil Camilo, Doruk Gökalp, Julian Klix, Daniil Iurchenko, and Jeremy Rubinoff ’20

An abandoned factory robot
Image by Peter H from Pixabay

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.

Around the world, and especially in high-tech economies, the demand and adoption of industrial robots have increased dramatically. The abandonment of robots (referred to as derobotization or, more broadly, deautomation) has, on the other hand, been less discussed. It would seem that the discussion on industrial robots has rarely been about their abandonment because, presumably, the abandonment of industrial robots would be rare. Our investigation, however, shows that the opposite is true: not only do a substantial number of manufacturing firms deautomate, a fact which has been overlooked by the literature, but the reasons for which they deautomate are highly multi-dimensional, suggesting that they depend critically on the productivity of firms and those firms’ beliefs about robotization.

Extending the analysis of Koch et al. (2019), we use data from SEPI Foundation’s Encuesta sobre Estrategias Empresariales (ESEE), which annually surveys over 2000 Spanish manufacturing firms on business strategies, including on whether they adopt robots in their production lines. We document three major facts on derobotization. First, firms that derobotize tend to do so quickly, with over half derobotizing in the first four years after adoption of robots. Second, derobotizing firms tend to be relatively smaller than firms which stay automated for longer periods of time. Third, firms that abandon robots demand less labor and increase their capital-to-labor ratios. The prompt abandonment of robots, we believe, is indicative of a learning process in which firms robotize production with expectations of higher earnings, but later learn information which causes them to derobotize and adjust their production accordingly.

With this in mind, we propose a dynamic model of automation that allows firms to both adopt robots and later derobotize their production. In our setup, firms face a sequence of optimal stopping problems where they consider whether to robotize, then whether to derobotize, then whether to robotize again, and so on. The production technology in our model is micro-founded by the task-based approach from Acemoglu and Autor (2011). In this approach, firms assign tasks to workers of different occupations as well as to robots in order to produce output. For simplicity, we assume two occupations, that of low-skilled and high-skilled workers, where the latter workers are naturally more productive than the former. When firms adopt robots, the firm’s overall productivity (and the relative productivity of high-skilled workers) increases, but the relative productivity of low-skilled workers decreases. At the same time, once firms robotize they learn the total cost of maintaining robots in production, which may exceed their initial expectations. At any point in time, firms can derobotize production with the newfound knowledge of the cost. Likewise, firms can reautomate at a lower cost with the added assumption that firms retain the infrastructure of operating robots in production.

The simulations of our model can accurately explain and reproduce the behavioral distribution of automation across firms in the data (see Figure 1). Indeed, we are able to show that larger and more productive firms are more likely to robotize and, in turn, the firms which derobotize tend to be less productive (referred to as the productivity effect). However, the learning process which reveals the true cost of robotized production (referred to as the revelation effect) also highlights the role of incomplete information as a plausible explanation for prompt abandonment.  Most importantly, our simulations suggest that analyses which ignore abandonment can overestimate the effects of automation and, therefore, must be incomplete. 

Our project is the first, to our knowledge, to document the pertinent facts on deautomation as well as the productivity effect and the revelation effect. It is apparent to us, based on our investigation, that any research seeking to model automation would benefit from modeling deautomation. From that starting point, there remains plenty of fertile ground for new questions and, consequently, new insights.

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About the Barcelona GSE Master’s Program in Economics

Cross-border effects of regulatory spillovers: Evidence from Mexico

Forthcoming JIE publication by Jagdish Tripathy ’11 (Economics)

Economics alum Jagdish Tripathy ’11 has a paper forthcoming in the Journal of International Economics on “Cross-border effects of regulatory spillovers: Evidence from Mexico.”

Paper abstract

This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.

Key takeaways

Loan-loss provisions introduced in Spain in 2012 imposed a significant burden on the balanced sheet of Spanish banks. This regulation was unrelated to the Mexican financial system or the credit conditions of Mexican households. However, Mexican subsidiaries of two large Spanish banks, BBVA and Santander, reduced lending to Mexican households in response to the regulation (Fig. 1).

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Fig. 1. Growth in credit lending by Spanish and non-Spanish banks in Mexico.

Mexican municipalities with a higher exposure to Spanish banks (Fig. 2) experienced a larger contraction in lending to households. This drop in lending to households (i.e. a drop in credit supply) was associated with a reduction in lending to the local non-tradable sector driven by a drop in local demand. This shows (1) cross-border effects of a macroprudential regulation on lending and economic activity, and (2) the macroeconomic effects of shocks in lending to households in an emerging economy.

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Fig. 2. Share of Spanish banks in the household credit market across Mexican municipalities.

About the author

Jagdish Tripathy ’11 is an Advisor at Bank of England. He is an alum of the Barcelona GSE Master’s in Economics and has his PhD from GPEFM (UPF and Barcelona GSE).

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Markets, Politics, and the Political: Can economics solve today’s most pressing problems?

by Pablo Hubacher Haerle ’20 (Economics)

Can economics be trusted in taking care of the most pressing questions of today in a neutral and un-ideological way? That is the topic of an essay written by Economics alum Pablo Hubacher Haerle ’20 for Chasmotics, an online publishing platform which seeks to question and problematize contemporary times through philosophical thought.

Painting: "The Bablyonian Marriage Market." Artist: Edwin Long. Year: 1875.
“The Babylonian Marriage Market.” Edwin Long (1875).

Exploring the link between politics and economics

Economics has long been perceived as an unattractively technocratic discipline. Recently, this trend seems to reverse, as economics becomes more popular among young people devoted to change the world for the better. Effective altruists, who seek to do the most good in the most efficient way, recommend that students acquire a PhD in economics, because “you have a high chance of landing an impactful research job” and it is “one of the most promising graduate study options for people who want to make a difference” (Duda 2015).

It is argued that tackling some of today’s pressing political problems such as climate change, income inequality or racism within the economical framework has the advantage of, unlike in less quantitative subjects such as history or sociology, dealing with such political issues with evidence, instead of ideology. But what exactly is the link between politics and economics? How do these two fields interact? And, can economics be trusted in taking care of the most pressing questions of today in a neutral and unideological way?

Looking at the relationship between economic thinking and politics, this essay suggests an answer.


About the author

Pablo Hubacher Haerle ’20 is a recent graduate from the Barcelona GSE Master’s in Economics.

Accounting for Mismatch Unemployment

JEEA publication by Benedikt Herz ’08 and Thijs van Rens (former BGSE professor)

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Benedkit Herz (Economics ’08, GPEFM ’13), has published a paper in the Journal of the European Economic Association. His co-author is former Barcelona GSE Professor Thijs van Rens (now at Warwick).

Paper abstract

We investigate unemployment due to mismatch in the United States over the past three and a half decades. We propose an accounting framework that allows us to estimate the contribution of each of the frictions that generated labor market mismatch. Barriers to job mobility account for the largest part of mismatch unemployment, with a smaller role for barriers to worker mobility. We find little contribution of wage-setting frictions to mismatch.


Benedikt Herz ’08 is member of the Chief Economist’s Team, European Commission DG for Internal Market and Industry. He is an alum of the Barcelona GSE Master’s in Economics.

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Democratic tipping points

VoxEU article by Adilzhan Ismailov ’15 (Economics) and Professor Antonio Ciccone

CEPR’s policy portal VoxEU has published the article “Democratic tipping points” by Economics alum Adilzhan Ismailov ’15 and Antonio Ciccone, professor at the Barcelona GSE and the UPF Economics department, where Adilzhan is currently doing his PhD.

VoxEU promotes “research-based policy analysis and commentary by leading economists.” The site receives about a half million page views per month.

Article summary

Persistence of democratisation following transitory economic shocks plays an important role in the theory of political institutions. This column tests the theory of democratic tipping points using rainfall shocks in the world’s most agricultural countries since 1946. Negative rainfall shocks have a strong and transitory effect on agricultural output, but a persistent positive effect on the probability of democratisation even after ten years.

Key conclusions

The recent history of democratic (non-)transitions in the world’s most agricultural countries indicates that transitory events can have enduring effects on democratic institutions. When lower rainfall led to below-average agricultural output in these countries, countries ruled by authoritarian regimes were more likely to democratise and more likely to be democratic ten years later.

The shape of the effect of rainfall on the probability of democratisation indicates that the effect is through agricultural output. The agricultural economics literature finds an inverted-U-shaped effect of rainfall on agricultural output. In the theory of Acemoglu and Robinson (2001, 2006) we build on, transitorily lower output raises the probability of democratisation, and transitorily higher output lowers the probability of democratisation. Hence, the inverted-U-shaped effect of rainfall on agricultural output should translate into a U-shaped effect of rainfall on the probability of democratisation. We find this to be the case. Moreover, our results indicate that rainfall shocks tend to produce the largest change in the probability of democratisation when the estimated effect of rainfall on agricultural output is largest.

Figure. Effect of rainfall on real agricultural output and on the probability of democratisation

Note: The inverted-U-shaped solid black line is the effect of rainfall in year t on real agricultural output in year t and is measured on the left axis. The U-shaped coloured lines are the effect of rainfall on the probability of democratisation between years t-1 and t (one year later). The three classifications of democratic and autocratic regimes used in the figure are those of Acemoglu et al. (2019) (blue solid line); Przeworski et al. (2000) (red dotted line), as updated by Cheibub et al. (2010) and Bjornskov and Rode (2020); and Geddes et al. (2014) (green dashed line). The effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t in column (1) of Tables 2 and 3 in the paper respectively for the Acemoglu et al. and the Przeworski et al. democratisation indicator. For the Geddes et al. democratisation indicator, the effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t-1 in column (5) of Table 3. This is because of Geddes et al.’s unconventional start date for democratic regime transitions; see page 16 for details. Real agricultural output is an index with the base period 2004-2006. Rainfall is measured in dm.

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Adilzhan Ismailov ’15 is a PhD candidate at GPEFM (UPF and Barcelona GSE). He is an alum of the Barcelona GSE Master’s in Economics.