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Normalizations and misspecification in skill formation models

Joachim Freyberger

An important class of structural models studies the determinants of skill formation and the optimal timing of interventions. In this paper, I provide new identification results for these models and investigate the effects of seemingly innocuous scale and location restrictions on parameters of interest. To do so, I first characterize the identified set of all parameters without these additional restrictions and show that important policy-relevant parameters are point identified under weaker assumptions than commonly used in the literature. The implications of imposing standard scale and location restrictions depend on how the model is specified, but they generally impact the interpretation of parameters and may affect counterfactuals.

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Contract Terms, Employment Shocks, and Default in Credit Cards

Sara G. Castellanos, Diego Jiménez-Hernández, Aprajit Mahajan, Eduardo Alcaraz Prous, and Enrique Seira

Regulatory concerns over a tension between expanding financial access and limiting default have led to significant restrictions on contract terms in a number of countries, despite limited evidence on their effectiveness. We use a large nation-wide RCT to examine new borrower responses to changes in interest rates and minimum payments for a credit card that accounted for 15% of all first-time formal loans in Mexico. Default rates were 19% over the 26 month experiment and a 30 pp decrease in interest rates decreased default by 2.5 pp with no effects on the newest borrowers.

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On the optimal design of a Financial Stability Fund

Árpád Ábraham, Eva Carceles-Poveda, Yan Liu, and Ramon Marimon

We develop a model of a Financial Stability Fund (the ‘Fund’ henceforth) for a union of sovereign countries. By design, the contract prevents country defaults, as well as undesired expected losses, which in a union translate into excessive risk mutualizations. A participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints.

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Globalization and the Ladder of Development: Pushed to the Top or Held at the Bottom?

David Atkin, Arnaud Costinot, and Masao Fukui

We study the relationship between international trade and development in a model where countries differ in their capability, goods differ in their complexity, and capability growth is a function of a country’s pattern of specialization. Theoretically, we show that it is possible for international trade to increase capability growth in all countries and, in turn, to push all countries up the development ladder. This occurs if (i) shifting employment towards more complex sectors raises capability growth and if (ii) foreign competition is tougher in less complex sectors for all countries.

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A Dynamic Theory of Random Price Discounts

Francesc Dilmé and Daniel F. Garrett

A seller with commitment power sets prices over time. Risk-averse buyers arrive to the market and decide when to purchase. We show that it is optimal for the seller to choose a constant high price punctuated by occasional episodes of sequential discounts that occur at random times. This optimal price path has the property that the price a buyer ends up paying is independent of his arrival and purchase times, and only depends on his valuation.

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Brokering Votes with Information Spread Via Social Networks

Raul Duarte, Frederico Finan, Horacio Larreguy, and Laura Schechter

Politicians rely on political brokers to buy votes throughout much of the developing world. We investigate how social networks facilitate these vote-buying exchanges. Our conceptual framework suggests brokers should be particularly well-placed within the network to learn about non-copartisans’ reciprocity in order to target transfers effectively. As a result, parties should recruit brokers who are central among non-copartisans.

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The impact of EITC on education, labor market trajectories, and inequalities

Albertini Julien, Arthur Poirier, and Anthony Terriau

As a complement to the federal earned income tax credit (EITC), some states offer their own EITC, typically calculated as a percentage of the federal EITC. In this paper, we analyze the effect of state EITC on education using policy discontinuities at US state borders. Our estimates reveal that an increase in the state EITC leads to a statistically significant increase in the high school dropout rate.

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Recently accepted to #REStud, "Normalizations and misspecification in skill formation models," from Joachim Freyberger:

https://www.restud.com/normalizations-and-misspecification-in-skill-formation-models/

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