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Bequests and Informal Long-Term Care: Evidence from the HRS Exit Interviews

Max Groneck and Frederic Krehl
University of Cologne, Working Paper Series in Economics No. 79, 2014

Keywords: Intergenerational Transfers, Strategic Bequest Motive, Informal Long-term care, Altruism

Informal care of children for their frail elderly parents may induce parents to compensate their children for their help. To test this hypothesis, we use the Exit Interview from the Health and Retirement Study. Our results show that caregiving has a significant positive impact on the incidence and the amount of received bequests both at the extensive and intensive margin of help. Three pieces of evidence suggest exchange motives rather than altruism to be the main source for this outcome. First, financially more well off children are more likely to receive an inheritance. Second, we find that a positive impact of help on bequest requires a written will as a contract between the parent and the helping child. Third, our results are even more pronounced when employing a fixed effects model to control for family altruism.

Bequests and Informal Long-Term Care: Evidence from the HRS Exit Interviews

 

 

Liquidity Premia and Interest Rate Parity

Ludger Linnemann and Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 78, 2014

Keywords: Exchange rate dynamics, uncovered interest rate parity, monetary policy shocks, liquidity premia

Due to the US dollar's dominant role for international trade and finance, risk-free assets denominated in US currency not only offer a pecuniary return, but also provide transactions services, both nationally and internationally. Accordingly, the responses of bilateral US dollar exchange rates to interest rate shocks should differ substantially with respect to the (US or foreign) origin of the shock. We demonstrate this empirically and apply a model of liquidity premia on US treasuries originating from monetary policy implementation. The liquidity premium leads to a modification of uncovered interest rate parity (UIP), which enables the model to explain an appreciation of the dollar subsequent to an increase in US interest rates if foreign interest rates follow the US monetary policy rate.

Liquidity Premia and Interest Rate Parity

 

 

Welfare Effects of Short-Time Compensation

Helge Braun and Björn Brügemann
University of Cologne, Working Paper Series in Economics No. 77, 2014

Keywords: Short-Time Compensation, Unemployment Insurance, Welfare

We study welfare effects of public short-time compensation (STC) in a model in which firms respond to idiosyncratic profitability shocks by adjusting employment and hours per worker. Introducing STC substantially improves welfare by mitigating distortions caused by public UI, but only if firms have access to private insurance. Otherwise firms respond to low profitability by combining layoffs with long hours for remaining workers, rather than by taking up STC. Optimal STC is substantially less generous than UI even when firms have access to private insurance, and equally generous STC is worse than not offering STC at all.

Welfare Effects of Short-Time Compensation

 

 

Who do you lie to? Social identity and the cost of lying

Christoph Feldhaus and Johannes Mans
University of Cologne, Working Paper Series in Economics No. 76, 2014

Keywords: Private information, deception, lying costs, social identity, experiment

We investigate whether and how an individuals’ propensity to lie is affected by the social relationship between a potential liar and her/his possible victim. We argue that a shared social identity of sender and receiver increases sender’s aversion to lie by raising two types of costs: the allocative and the social costs of the lie. Allocative costs should be larger in ingroup interactions because social preferences are stronger and thus losses to the receiver are weighted more heavily while social costs should be higher in closer relationships due to stricter moral rules. In contrast to our hypothesis our experimental results from a modified three-person sender-receiver game do not provide evidence that social identity affects lying behavior. While across all treatments about half of the participants send a dishonest message, we do not observe differences in lying behavior towards ingroup and outgroup members: neither with respect to allocative nor in terms of social costs. Hence, in our experiment lying behavior is robust to social identity manipulations.

Who do you lie to? Social identity and the cost of lying

 

 

Strategic Disclosure of Demand Information by Duopolists: Theory and Experiment

Jos Jansen and Andreas Pollak
University of Cologne, Working Paper Series in Economics No. 75, 2014

Keywords: duopoly, Cournot competition, Bertrand competition, information disclosure, incomplete information, common value, product differentiation, asymmetry, skewed distribution, laboratory experiment

We study the strategic disclosure of demand information and product-market strategies of duopolists. In a setting where firms may fail to receive information, we show that firms selectively disclose information in equilibrium in order to influence their competitor’s product-market strategy. Subsequently, we analyze the firms’ behavior in a laboratory experiment. We find that subjects often use selective disclosure strategies, and this finding appears to be robust to changes in the information structure, the mode of competition, and the degree of product differentiation. Moreover, subjects in our experiment display product-market conduct that is largely consistent with theoretical predictions.

Strategic Disclosure of Demand Information by Duopolists: Theory and Experiment

 

 

Monetary and Fiscal Policy with Sovereign Default

Joost Röttger
University of Cologne, Working Paper Series in Economics No. 74, 2014

Keywords: Monetary and Fiscal Policy, Lack of Commitment, Sovereign Default, Domestic Debt, Markov-Perfect Equilibrium

How does the option to default on debt payments affect the conduct of public policy? To answer this question, this paper studies optimal monetary and fiscal policy without commitment in a model with nominal debt and endogenous sovereign default. When the government can default on its debt, public policy changes in the short and the long run relative to a setting without default option. The risk of default increases the volatility of interest rates, impeding the government's ability to smooth tax distortions across states. It also limits public debt accumulation and reduces the government's incentive to implement high inflation in the long run. The welfare costs associated with the short-run effects of sovereign default are found to be outweighed by the welfare gains due to lower average debt and inflation.

Monetary and Fiscal Policy with Sovereign Default

 

 

Default Risk Premia on Government Bonds in a Quantitative Macroeconomic Model

Falko Juessen, Ludger Linnemann and Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 73, 2014

Keywords: Sovereign default; fiscal policy; government debt

We develop a macroeconomic model where the government does not guarantee to repay debt. We ask whether movements in the price of government bonds can be rationalized by lenders’ unwillingness to fully roll over debt when the outstanding level of debt exceeds the government’s repayment capacity. Investors do not support a Ponzi game and ration credit supply in this case, thus forcing default at an endogenously determined fractional repayment rate. Interest rates on government bonds re.ect expectations of this event. Numerical results show that default premia can emerge at moderately high debt-to-GDP ratios where even small changes in fundamentals lead to steeply rising interest rates. The behavior of risk premia broadly accords to recent observations for several European countries that experienced a worsening of fundamental fiscal conditions.

Default Risk Premia on Government Bonds in a Quantitative Macroeconomic Model

 

 

Mortgage Default during the U.S. Mortgage Crisis

Thomas Schelkle
University of Cologne, Working Paper Series in Economics No. 72, 2014

Keywords: Mortgage default, mortgage crisis, house prices, negative equity

Which of the main competing theories of mortgage default can quantitatively explain the rise in default rates during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment is consistent with the evidence. In contrast a traditional frictionless default model predicts a too strong increase in default rates. The paper also provides microfoundations for double-trigger behavior in a model where unemployment may cause liquidity problems for the borrower. Using this framework for policy analysis reveals that a mortgage crisis may be mitigated at a lower cost by relieving the liquidity problems of borrowers instead of bailing out lenders.

Mortgage Default during the U.S. Mortgage Crisis

 

 

Social Security and the Interactions Between Aggregate and Idiosyncratic Risk

Daniel Harenberg and Alexander Ludwig
University of Cologne, Working Paper Series in Economics No. 71, 2014

Keywords: social security, idiosyncratic risk, aggregate risk, welfare

We ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household’s life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks.

Social Security and the Interactions Between Aggregate and Idiosyncratic Risk

 

 

Pork barrel politics, voter turnout, and inequality: An experimental study

Jens Großer and Thorsten Giertz
University of Cologne, Working Paper Series in Economics No. 70, 2014

Keywords: Pork barrel politics, voter turnout, inequality, Colonel Blotto games, laboratory experiments

We experimentally study pork barrel politics in two-candidate majoritarian elections. Candidates form distinct supporter groups by favoring some voters in budget spending at the expense of others. We compare voluntary and compulsory costly voting and find that, on average, the former mode induces more narrowly targeted favors and therefore more inequality among otherwise identical voters. When the same candidates act over many elections, such as with parties, they tend to cultivate policy polarization by frequently favoring their exclusive supporters again and avoiding those of the opponent, and with compulsory voting we find additional frequent policy overlap for a separate subset of voters. Our findings are important for understanding how an inclination towards a sustained “divided society” can arise purely from the political process, absent of any coordination devices such as ideological preferences.

Pork barrel politics, voter turnout, and inequality: An experimental study