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Alternative GMM estimators for spatial regression models

Jörg Breitung and Christoph Wigger
University of Cologne, Working Paper Series in Economics No. 89, 2017

Keywords: Spatial Econometrics, Spatial error correlation, GMM-estimation

Using approximations of the score of the log-likelihood function we derive optimal moment conditions for estimating spatial regression models. Our approach results in computationally simple and robust estimators. The moment conditions resemble those proposed by Kelejian & Prucha (1999), hence we provide an intuitive interpretation of their estimator as a second order approximation to the log-likelihood function. Furthermore we propose simplified and efficient GMM estimators based on a convenient modification of the moment conditions. Heteroskedasticity robust versions of our estimators are also provided. Finally, a first order approximation for the spatial lag model is also considered. Monte Carlo results suggest that a simple just-identified estimator based on a quadratic moment derived from a first order approximation of the score of the log-likelihood function performs similar to the GMM estimator proposed by Kelejian & Prucha (2010).

Alternative GMM estimators for spatial regression models

Do You Dare? The Effect of Economic Conditions on Entrepreneurship among College Graduates

Hendrik Beiler
University of Cologne, Working Paper Series in Economics No. 88, 2016

Keywords: Entrepreneurship, Business Cycles, Higher Education, Occupational Choice, Firm Entry

I estimate the effect of business cycle conditions on the decision to enter entrepreneurship after college graduation. I proxy for economic conditions at the field of study level, constructed from industry growth rates which I weight to fields of study using employees' industry - college major distribution. This enables to control for unobserved differences between graduation cohorts such as technological change or shifts in cohort composition. Using administrative survey data for Germany, I find that a one percentage point increase in employment growth in the year of graduation raises entry into entrepreneurship by about 30% in the first year after graduation. The effect halves in the second year and is close to zero in the third and fourth year after graduation. Interestingly, exit from entrepreneurship decreases slightly, which suggests that the additional entrepreneurs are fairly stable in the first years after entry. Taken together, my results imply that "lucky" graduation cohorts are persistently more likely to enter and persist in entrepreneurship than "recessionary" cohorts, at least during the first four years after graduation that I examine. My results have relevant implications for policy measures such as startup subsidies, since entrepreneurship is commonly acknowledged as a central source of job creation and economic dynamism.

Do You Dare? The Effect of Economic Conditions on Entrepreneurship among College Graduates

General Methods for Measuring Factor Misallocation

Thomas Schelkle
University of Cologne, Working Paper Series in Economics No. 87, 2016

Keywords: Misallocation, factor allocation, test, bounds

The paper develops novel methods to measure the extend of factor misallocation. These rely on production functions being homogeneous, but not on specific parameterizations and partly not even on specific functional forms. This reduces the risk to incorrectly reject an efficient allocation. In an empirical application these general methods strongly reject an efficient capital and labor allocation across 473 six-digit U.S. manufacturing industries. Potential output gains of efficiently reallocating factors are between 22 and 64% of observed output. There is also evidence that misallocation increased substantially during the Great Recession with a sizeable contribution to the observed fall in manufacturing output.

General Methods for Measuring Factor Misallocation

Optimal Fiscal Substitutes for the Exchange Rate in a Monetary Union

Christoph Kaufmann
University of Cologne, Working Paper Series in Economics No. 86, 2016

Keywords: Monetary union, Optimal monetary and fiscal policy, Exchange rate

This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate exibility leads to welfare costs that depend significantly on whether the law of one price holds internationally or whether firms can engage in pricing-to-market. Calibrated to the euro area, the welfare costs can be reduced by 86% in the former and by 69% in the latter case by using only one tax instrument per country. Fiscal devaluations can be observed as an optimal policy in a monetary union: if a nominal devaluation of the domestic currency were optimal under exible exchange rates, optimal fiscal policy in a monetary union is an increase of the domestic relative to the foreign value added tax.

Optimal Fiscal Substitutes for the Exchange Rate in a Monetary Union

Leisure and Learning - Activities and Their Effects on Child Skill Development

Peter Funk and Thorsten Kemper
University of Cologne, Working Paper Series in Economics No. 85, 2016

Keywords: Child development, leisure time activities

This paper studies how variations in leisure time allocation help explain the variations in school children's cognitive skills. We use representative data on the time use of American children from the Child Development Supplement (CDS) to the Panel Study of Income Dynamics (PSID). Our findings suggest that 1) including time use data significantly contributes to explaining the variation in math and reading test scores; 2) in a relative ranking of the effect of raising the time spent on a given activity on the math test score music is placed at the top, followed by learning, reading, sports, watching television, attending school and sleep (in descending order). For the reading test score music ranks first again and reading second, before learning, school, television, sports and sleep; 3) when comparing the effect of child activities with that of parental investments on test scores in the PSID data, it turns out that activities have no less explanatory power than investments, proxied by an established investment measure, with higher explanatory power for the production of math skills.

Leisure and Learning - Activities and Their Effects on Child Skill Development

Endogenous Growth, Green Innovation and GDP Deceleration in a World with Polluting Production Inputs

Kerstin Burghaus and Peter Funk
University of Cologne, Working Paper Series in Economics No. 84, 2016

Keywords: Endogenous Growth, Direction of Technical Change, Pollution, Green Innovation, Rebound Effect

We study economic growth and pollution control in a model with endogenous rate and direction of technical change. Economic growth results from growth in the quantity and productivity of polluting intermediates. Pollution can be controlled by reducing the pollution intensity of a given quantity through costly research (green innovation) and by reducing the share of polluting intermediate quantity in GDP. Without clean substitutes, saving on polluting inputs implies that the rate of GDP growth remains below productivity growth (deceleration). While neither green innovation nor deceleration is chosen under laissez-faire, both contribute to long-run optimal pollution control for reasonable parameter values.

Endogenous Growth, Green Innovation and GDP Deceleration in a World with Polluting Production Inputs

Man-cessions, Fiscal Policy, and the Gender Composition of Employment

Christian Bredemeier, Falko Juessen and Roland Winkler
University of Cologne, Working Paper Series in Economics No. 83, 2015

Keywords: Fiscal Policy, Gender, Employment, Occupations

In recessions, predominantly men lose their jobs, which has been described by the term ”man-cessions”. We analyze whether fiscal expansions bring men back into jobs. We show empirically that expansionary fiscal shocks predominantly raise the employment of women, which further destabilizes the gender composition of employment in recessions. Our results show that man-cessions are triggered by industry effects while the gender-specific employment effects of fiscal policy are driven by disproportionate employment changes in female-dominated occupations, specifically so-called ”pink-collar” occupations. We develop a business-cycle model that explains these occupational employment dynamics as a consequence of differences in the substitutability between capital and labor across occupations.

Man-cessions, Fiscal Policy, and the Gender Composition of Employment

Ancestral kinship patterns substantially reduce the negative effect of increasing group size on incentives for public goods provision

Hannes Rusch
University of Cologne, Working Paper Series in Economics No. 82, 2015

Keywords: public goods, inclusive fitness, altruism, relatedness, kinship

Phenomena like meat sharing in hunter-gatherers, self-sacrifice in intergroup conflicts, and voluntary contribution to public goods provision in laboratory experiments have led to the development of numerous theories on the evolution of altruistic in-group beneficial behavior in humans. Many of these theories abstract away from the effects of kinship on the incentives for public goods provision, though. Here, it is investigated analytically how genetic relatedness changes the incentive structure of that paradigmatic game which is conventionally used to model and experimentally investigate collective action problems: the linear public goods game. Using recent anthropological data sets on relatedness in 61 contemporary hunter-gatherer and horticulturalist societies the relevant parameters of this model are then estimated. It turns out that the kinship patterns observed in these societies substantially reduce the negative effect of increasing group size on incentives for public goods provision. It is suggested, therefore, that renewed attention should be given to inclusive fitness theory in the context of public goods provision also in sizable groups, because its explanatory power with respect to this central problem in the evolution of human cooperativeness and altruism might have been substantially underrated.

Ancestral kinship patterns substantially reduce the negative effect of increasing group size on incentives for public goods provision

Household Specialization and the Labor-Supply Elasticities of Women and Men

Christian Bredemeier
University of Cologne, Working Paper Series in Economics No. 81, 2015

Keywords: Labor-supply elasticity, gender, home production

This paper studies gender differences in the elasticity of labor supply in a model of household specialization. I show that household specialization implies larger Frisch elasticities for the partner that specializes in home production. Quantitatively, empirical time-use ratios alone imply differences in the Frisch elasticity between women and men of more than 50%. Similar results are obtained for long-run elasticities. My results imply that the elasticity of labor supply is not a deep parameter which can, e.g., explain parts of the state-dependent effects of fiscal policy.

Household Specialization and the Labor-Supply Elasticities of Women and Men

Fiscal policy, interest rate spreads, and the zero lower bound

Christian Bredemeier, Falko Juessen and Andreas Schabert
University of Cologne, Working Paper Series in Economics No. 80, 2015

Keywords: Fiscal multiplier, tax policy, interest rate spreads, zero lower bound, liquidity premium

This paper questions unconventional …fiscal policy effects when the monetary policy rate is at the zero lower bound. We provide evidence for the US that the spread between the policy rate and the US-LIBOR, which is more relevant for private sector transactions, increases with government expenditures. We introduce a corresponding spread into an otherwise standard macroeconomic model which reproduces this observation. The model predicts that the …fiscal multiplier takes conventional values, regardless of whether the policy rate follows a standard feedback rule or is at its zero lower bound. Likewise, labor tax increases exert contractionary effects in both cases.

Fiscal policy, interest rate spreads, and the zero lower bound