Europe out of balance: an analysis of current accounts in Europe

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Europe out of balance: an analysis of current accounts in Europe

Author:

Michel Carlo Nies

Master Program:

Economics

Paper Abstract:

The European sovereign debt crisis should not only be seen as the simple failure to manage public finances, but also as the consequence of divergent balance of payment positions. This paper attempts to shed light on this line of argument by analysing empirically the determinants of current accounts. The principal conclusion is that divergent developments in labour costs and misallocation of capital are behind the developments that led to the sovereign debt crisis. Given these results, this paper also evaluates different policy measures designed to address the issue of diverging current accounts.

Read the full paper or view slides below:

Collusion in auctions and the role of communication to sustain it: a microeconomic approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Collusion in auctions and the role of communication to sustain it: a microeconomic approach

Author:

Giuseppe Leonello

Master Program:

Competition and Market Regulation

Paper Abstract:

Collusion among bidders in auctions is an important topic in competition economics since it decreases the seller’s revenues and the social welfare. In this project the focus will be on the role of communication among bidders for the incentives to collude.

In the literature, communication among bidders has always been treated as an exogenous variable. This assumption will be relaxed and the choice of communicate will be endogenous and function of the expected collusive profits and the expected costs of collusion represented by the risk to be catch and punished.

The auctioneer can monitor the market and the auction process to discover the collusive agreement, exerting a costly effort.

The model will find the minimum level of effort needed to make bidders not having incentives to communicate and collude. However, the auctioneer will exert this level of effort only when the expected gains are higher than expected costs. For this reason, in some case the optimal choice for the auctioneer will be to lead bidders to collude even if this will not maximize the social welfare.

Government interventions to reach the not collusive equilibrium will be discussed. In particular, they will take the form of an increase in the punishment when bidders are discovered to collude and the subsidization of the cost needed to exert the optimal level of effort.

Effectiveness of primary care ValCRÒNIC teleHealth program

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Effectiveness of primary care ValCRÒNIC teleHealth program: outcome findings on mortality and healthcare service consumption in patients with high-risk chronic conditions. A cohort study with matched controls in Valencia community, Spain.

Author:

Sherman Kong

Master Program:

Health Economics and Policy

Paper Abstract:

We analyze the mortality and hospitalization level of 512 patients enrolled in the ValCRÒNIC teleHealth program in Valencia public health region with a matched control of 1023 patients with same risk profiles. We obtain medical records of patient sample for 12 months before start of trial and follow-up on consumption level from hospital and primary care facilities for 12 months during program. We observed utilization level before and after trial and found an increase in primary care nurse and home care visitations. We used logistic and zero-inflated Poisson models to estimate effect of program enrollment to intense acute hospital use, deaths and avoidable hospitalization rate. We found insignificant benefits to reducing mortality and intense acute hospital use.

Author’s note: This paper is a work in progress, pending revision of results.

Read the full paper or view slides below:

Government spending news and the term structure of interest rates

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Government spending news and the term structure of interest rates

Authors:

Nicola Cofelice and Sarah Zoi

Master Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Studying the effect of a fiscal policy shock on the term structure of interest rates has long been a controversial issue. On the one hand, economic theory predicts that government spending should drive up interest rates; on the other hand, many empirical analyses found negative or not significant responses of the yield curve to different types of fiscal shocks. A recent stream of literature on fiscal foresight showed how news about future fiscal policy may anticipate the effects of public expenditure and pose a challenge for the recovery of structural shocks due to a problem of non-fundamentalness. We study the effect of a “foresight shock” on the term structure of interest rates using an identification strategy based on the information contained in the projections by the Survey of Professional Forecasters. Our results support the evidence of fiscal foresight and show how changes in expectations stimulate positive responses of the term structure anticipating the effects of a government spending shock.

Read the full paper or view slides below:

Does Extended Time Improve Students’ Performance?

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Does Extended Time Improve Students’ Performance? Evidence from Catalonia

Authors:

Ana María Costa Ramón, Laia Navarro-Sola, Patricia de Cea Sarabia

Master Program:

Economics

Project Summary:

Education is one of the main priorities of developed societies, and countries are investing huge amounts of resources in this area. However, little is known about the effectiveness of the inputs used in the education production function, leaving the final decision of investment to ideological or political reasons. In this context, there is an increasing support of extending class time among politicians and policy-makers as a way of improving education. Our paper is an investigation of the effect of an increase in the number of hours per day of class on the performance of the students.

As identification strategy, we exploit the exogenous variation generated by a policy change in Catalonia (a region of Spain), known as the “sixth hour policy”. This reform introduced one extra hour per day, representing an increase of 20% of the total number of hours per year. It involved an important investment for Catalonia and thus, knowing the effects of the policy is needed in order to assess whether it was effective or if there exists other alternatives. The specific characteristics of the policy implementation provide three different sources of variation: variation between cohorts, generated by the sudden implementation, variation between types of schools, since the policy was only addressed to public schools (leaving private schools timetable unchanged) and in last term, variation across regions, as the reform only affected public schools in Catalonia. These features allow us to take the policy implementation as a natural experiment and thus, to investigate more deeply the effects of extending school time.

Using the PISA database and the econometric specification of differences-in-differences, we find that there is no conclusive evidence of the causal relationship between extending school time and performance improvement. This difficulty comes from the implementation of the policy itself which was done simultaneously with other major educational changes, and thus it is hard to identify the channel through which this effect could be operating.

However, we face this lack of evidence on this causality introducing an innovative methodology in the study of extending time at school. To solve specific concerns about the suitability of the control group we construct a “synthetic control” group (an artificial control group), which is a weighted combination of other Spanish regions chosen to resemble education characteristics of Catalonia before the introduction of the “sixth hour policy” as much as possible. However, the particularities of the region of the study make it very hard to predict its behavior.

All in all, we believe that the use of the synthetic control approach can help to shed light on these issues in different case studies or with more detailed data. The analysis of time as an input in the education production function still requires a lot of research but as we have seen with our case study, natural experiments by themselves could be an imperfect tool. Maybe it is time to use more innovative approaches to this old topic.

Read the full paper or view slides below:

Competition and the Hold-Up Problem – Guillem Roig ’08

Editor’s note: The following post was written by Barcelona GSE alumnus Guillem Roig (Competition and Market Regulation ’08). Guillem is currently a PhD student at the Toulouse School of Economics in France.


Competition and the Hold-Up Problem: a Setting with Non-exclusive Contracts

words-roig

The paper

Why some of us do not spend the desired time and resources to nurture and improve the relationship with our parents, friends or business partners? Because once the time and resources are spent, we are afraid of possible opportunistic behavior. Economists frame opportunistic behavior in simple trading relationships where a buyer and seller are able to undertake specific investment into the exchanged good. Fisher Body, a manufacturer of body cars, refused to locate their body plants adjacent to General Motors assembly plans, a move that was necessary for production efficiency.

To fight opportunistic behavior we cannot rely on “good faith” alone, but we need to establish institutions to reduce its occurrence. Many modern societies have written laws, neutral courts of justice and arranged reasonable rules to resolve disputes. Yet, what happens when a sound and solid institutional system does not exists? In this paper, I consider situations where investment contracts cannot be enforced and I explore how the introduction of competition among the sellers of an homogeneous good gives the right incentives to undertake profitable specific investment.

In these types of models, the equilibrium payoff of the sellers is a measure of their indispensability, which directly depends on the outside option available to the buyer. The trading partners invest efficiently only when the trading outcome is the most competitive. When competition is the most severe, investments do not effect the outside option of the buyer and each seller appropriates his marginal contribution of the trading surplus. Any other equilibrium gives the seller incentives to over-invest. Sellers’ investments not only generate larger trading surpluses but also reduce the outside option of the buyer. The asymmetric partition of the trading surplus generates investment inefficiencies.

In a related article, I study how the configuration of the market structure is affected by the way an endogenous number of suppliers compete in the market. With non-exclusive trade and a common buyer undertaking cooperative investment, I obtain a direct link between the level of competition and investment that affects the market structure of the supply side of the market. Trading outcomes that are more competitive are associated with a larger and more homogeneous distribution of investment among active suppliers, and an equilibrium with no investment might occur in trading outcomes that are less competitive. Buyer’s investment works as a mechanism to incentivize competition and this becomes more effective the more competitive the trading outcome is. The paper gives a theoretical insight for the coexistence of first with second tier suppliers and predicts situations where investment does not materialize.

Download the full working paper [pdf]

The process

I started this project in September 2012, after a short visit at the University of Arizona where I meet a group of law academics working on the design of trading contracts. I soon became interested in topics of contract theory and organization design and researched in the area of transaction cost economics.

The upturn of the project came in May 2013 when I benefited from an ENTER exchange program at the Universitat Autònoma de Barcelona. I presented my work in a series of seminars and the suggestions of Prof. Inés Macho and David Pérez Castrillo were invaluable at that stage of the project. I dismissed the design of complex trading contracts and I went back to basics. I concentrated on framing the problem of transaction costs without any established formal institution.

In my model, I never talk about investment contingent contracts or contract enforceability, I only allow for the interaction of economic agents in the market. In many situations, we might not need a complex and sophisticated institutional framework but we just must allow “the invisible hand” to function.

Toulouse School of Economics
Toulouse School of Economics

The working paper series of the Toulouse School of Economics are free and accessible online, so for further information please check out my articles here!

A bullet a day keeps the doctor away: the effect of war over health expenditure

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


A bullet a day keeps the doctor away: the effect of war over health expenditure

Authors:

Rita Abdel Sater and María José Ospina Fadul

Master Program:

Health Economics and Policy

Project Summary:

Although there is an ongoing debate on how much an increase in health expenditure would actually improve the health condition of its population (as this relation also depends in factor such as efficiency), the truth is that the level of expenditure in many developing countries is still under the basic needed level suggested by the World Health Organization. Furthermore, it has become clear that the public budget plays a fundamental role in the financing of a health system: in fact, the public expenditure on health should increase by 5% on average in these countries to provide the basic conditions in order to accomplish the millennium goals. However, the struggle to achieve acceptable levels of health expenditure has faced several obstacles. This article intends to determine if war is in fact one of them.

Within this context, this article tries to determine the effect of war over health expenditure level and composition, particularly in terms of the public budget participation. So far several articles have examined the effects of war over public health but none have determined the effect that it has over the levels and the composition of the health expenditure. Additionally, this article contributes to the existent literature in the sense that it classifies conflicts as high or low intensity and discerners between these two when determining their effect over health expenditure.

We used panel data on the 27 countries that had both episodes of war and episodes of peace in the period that goes from 1995 to 2008. We applied clustering techniques to classify these conflicts as high or low intensity and after this we used Arellano-Bond estimators to determine the effect of war over the level and composition of health expenditure.

Sample and intensity classification
Sample and intensity classification

 

Surprisingly, we found that low intensity wars have a negative and statistically significant effect over health expenditure while there seems to be no effect when there is a high intensity war. Moreover, we found that public expenditure in health increases when there is a high intensity war while there is no change in the composition when there is a low intensity war. These results suggest that when there is a high intensity conflict the decrease in private investment in health is compensated by an increase in public expenditure, while in countries exposed to low intensity wars the decrease in private expenditure is not equalized by an increase in public expenditure.

Finally, in terms of the compositions of this expenditure we found that the public expenditure in health as a percentage of total public expenditure stays the same in countries exposed to high intensity conflicts while it decreases in countries with low intensity conflicts. These results, in combinations with the former, provide empirical evidence to support Peacock and Wiseman’s expenditure displacement theory according to which public expenditure increases during times of crisis.

 

Realized Volatility Estimation – Barcelona GSE Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Realized Volatility Estimation

Authors:

Miquel Masoliver, Guillem Roig, Shikhar Singla

Master Program:

Finance

Paper Abstract:

The main purpose of this study is to try to find the optimal volatility estimator in a non-parametric framework. In particular, this study focuses on the estimation of the daily integrated variance-covariance matrix of stock returns using simulated and high-frequency data in the presence of market microstructure noise, jumps, and non-synchronous trading. This work is structured in three building blocks: (i) price processes are simulated in the presence of jumps and market microstructure noise. This allows us to obtain some insight about the estimators’ performance. (ii) The aforementioned realized volatility estimators are applied to high-frequency data of the S&P 100 stocks of October 27th 2010 using 5-second, 10-second, 30-second, 1-minute and 2-minute time intervals. (iii) We use the estimated covariance matrices to construct the global minimum variance portfolio for each sampling frequency. These global minimum variance portfolios are used to build 30 day ex-post portfolio’s returns and we use the variance of these returns to compare between the performance of the estimators.

Read the full paper or view slides below:

Rethinking Fogape – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Rethinking Fogape: An Evaluation of Chile’s Partial Credit Guarantee Scheme

Authors:

Margarita Armenteros, Niccolò Artellini, Andreas Hoppe, Marco Urizar, and Bernard Yaros

Master Program:

International Trade, Finance and Development

Paper Summary:

Small-and-medium enterprises (SMEs) often find themselves credit constrained due to a lack of collateral, limited credit history, and informational asymmetries that entail high monitoring costs for lenders. Governments around the world have introduced partial credit guarantee schemes (PCGS) to overcome these constraints and ease financial access for SMEs. These schemes aim to relieve credit-constrained firms by providing public collateral that reduces the risk borne by private lenders in the event of a default. In recent years, PCGS have been utilized as a way to protect SME lending in the backdrop of the global credit crunch.

Why are SMEs important? Any economy is dependent on the innovation, technological change, and job creation that new enterprises introduce, and in most cases, such firms are small in size. The role of SMEs in Chile is no exception. By 2009, the SME sector in Chile contributed to 20% of GDP, and the percentage of workers employed in SMEs stood at 56.4% in 2011. Nevertheless, Chilean SMEs have pointed to the fact that their difficulties in obtaining a formal loan rest with a lack of guarantees and high financial costs.

In 2000, Chile relaunched its public guarantee fund Fogape (Fondo de garantías para pequeños empresarios) with the goal of providing public guarantees for loans taken out by SMEs with private financial institutions. In 2007 and 2009, the government re-capitalized the fund by $10 million and $130 million respectively as a direct countercyclical response to the international financial crisis. Fogape is unique in the way by which it disseminates its guarantees into the credit market; it does so through an auctioning system that is designed to reduce moral hazard on the part of participating banks that bid for Fogape’s guarantees.

To assess econometrically the impact of Fogape on eligible firms, we used firm-level data obtained from two longitudinal surveys undertaken by the Ministry of Economy. We employed the strategy of regression discontinuity design (RDD) in which receipt of the treatment depends discontinuously on the value of one or more observable characteristics of the subjects. In our case, we exploited an arbitrary threshold of eligibility by which only firms with reported sales less than $750,000 are eligible for Fogape’s guarantees.

We estimated the intention-to-treat, or the effect of eligibility to Fogape on eligible firms vis-à-vis ineligible ones. In keeping with the literature on RDD, we restricted our sample of interest to only those enterprises whose reported sales fall within a distance h on either side of the sales cutoff of eligibility. Our robustness checks confirmed that eligible and ineligible firms at the margins on either side of the cutoff were not systematically different in key baseline characteristics.

We selected the following outcome variables in which we expected to observe a change due to Fogape’s presence: the log difference of sales from 2007 to 2009; debt-to-equity ratio in 2009; profit margin in 2009; and long-term debt over total debt in 2009.

Log Sales Growth

 

We did not obtain any statistically significant results, suggesting that the effect of eligibility is neither positive nor harmful to the various performance indicators of the eligible enterprises in our sample of interest. We found that eligible firms within our bandwidth h, ceteris paribus, experienced less proportional change in their sales from 2007 to 2009 than ineligible ones. We had expected to see firms that are eligible for credit guarantees to have higher sales growth because of the investment in working capital and productive assets that such access to credit would allow for. The finding from our RDD analysis that eligible firms had less debt-to-equity in 2009 than non-eligible ones was equally puzzling. We expected eligibility to have increased their debt-to-equity ratio vis-à-vis similar ineligible firms because of the loans they are getting through Fogape. Finally, the result that eligible, surveyed firms had less long-term to total debt in 2009 than ineligible ones within our bandwidth h was also contrary to our expectations. Fogape has put emphasis on its allocation of guarantees to long-term credit, which led us to believe that there would be a corresponding increase in the long-term over total debt ratio of eligible firms.

We started with the premise that SMEs are credit constrained, which validates Fogape’s raison d’être in the economy as a provider of credit. We also assumed that this guaranteed credit would be used for productive investments, which would then be reflected in firm profitability and sales growth. Why do we find no evidence of Fogape’s impact during the period of 2007 to 2009? Are firms receiving Fogape-guaranteed loans not truly credit constrained? Or are lenders substituting Fogape guarantees for private ones? Do these firms have the expertise or productivity to undertake successful investments? In the survey used in our study, it is possible to identify 369 firms that received Fogape guarantees for a secondary loan in 2009. Out of these firms, 40% obtained their primary loan using physical collateral and 18% using private guarantees, thereby hinting at a substitutability problem. However, it is still not possible to say that Fogape users, which already had access to the fund or other sources of credit, were not credit constrained to begin with. We suggest more research be carried out and that the portfolio of participating lenders be reviewed to determine whether lenders have been substituting private for public guarantees and if Fogape beneficiaries were truly credit constrained. We find evidence that firms also face difficulties besides credit constraints. In the 2010 World Bank Enterprise Survey, Chilean firms identify an inadequately educated workforce as their second largest constraint. Furthermore, 25% of small and 22% of medium-sized firms identify this very constraint as their main obstacle. To address productivity concerns as well as competitiveness issues facing SME’s, we propose more complementarity between Fogape and other pro-SME institutions and public programs.

Read the full paper or view slides below:

Economic curriculum reform: why do we need it?

Carlos De SousaBarcelona GSE alum Carlos De Sousa ’12 is an Affiliate Fellow at Bruegel. His latest article on Bruegel’s website looks at the global debate about the economics curriculum as students, academics and policymakers seek to bring the field closer to the real world and introduce pluralism into its educational system.

Economic curriculum reform: why do we need it? – Read the full article at Bruegel

See Carlos De Sousa’s scholar profile at Bruegel