Working Papers 2011

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26-11 -Government`s Credit-Rating Concerns and the Evaluation of Public Projects
Nadav Levy and Ady Pauzner
 

Published in: Journal of Public Economics, Volume 115, July 2014, Pages 117–130
 

Working Paper #26-11
Government`s Credit-Rating Concerns and the Evaluation of Public Projects
 
Nadav Levy and Ady Pauzner
Public projects typically generate both monetary revenue and social benefits that cannot be monetized. Anticipated revenues from government-owned projects increase the liklihood that the government will be able to repay its debt and thus improve its credit rating and lower the .nancing costs of the debt. This should give monetary revenue an added value relative to social bene.ts. However, informational problems .dynamic inconsistency and adverse selection .push the government to an excessive emphasis on social bene.ts, ignoring the external effect of monetary revenue on debtholders. Since the credit market anticipates this, the government.s credit rating is adversely affected and it is thus unable to extract the full potential of the projects. Finally, we show that while privatization can sometimes alleviate these problems, there are cases in which the government would be better o¤ if its hands were tied and it were not allowed to privatize.

Published in: Journal of Public Economics, Volume 115, July 2014, Pages 117–130

Keywords: public projects, credit rating, social discount rate, privatization.

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25-11 TAX COMPETITION AND MIGRATION: THE RACE-TO-THE-BOTTOM HYPOTHESIS REVISITED
 
Assaf Razin and Efraim Sadka
 

Published in: CESifo Economic Studies, Volume 58, Issue 1, Pages. 164-180, 2012
 

Working Paper #25-11
TAX COMPETITION AND MIGRATION: THE RACE-TO-THE-BOTTOM HYPOTHESIS REVISITED
 
Assaf Razin and Efraim Sadka
The literature on tax competition with free capital mobility cites several reasons for the race-to-the-bottom hypothesis in the sense that tax competition may yield significantly lower tax rates than tax coordination. With a fixed (exogenously given) population that can move from one fiscal jurisdiction to another, the Tiebout paradigm suggests that tax competition among these jurisdictions yields an efficient outcome, so that there are no gains from tax coordination. The Tiebout paradigm considers the allocation of a given population among competing localities. Our model of international tax-transfer and migration competition among host countries deviates from the Tiebout paradigm in that the total population in the host countries and its skill distribution are endogenously determined through migration of various skills. As a result, competition needs not be efficient. This paper suggests that when a group of host countries faces an upward supply of immigrants, tax competition does not indeed lead to a race to the bottom; competition may lead to higher taxes than coordination.

Published in: CESifo Economic Studies, Volume 58, Issue 1, Pages. 164-180, 2012
Jel Nos.: F2,H2

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24-11 - The Desirability of Workfare as a Welfare Ordeal - Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
 

Published in: International Tax and Public Finance February 2013, Volume 20, Issue 1, pp 71-88
 

Working Paper #24-11
The Desirability of Workfare as a Welfare Ordeal - Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
In this paper we challenge the conventional wisdom that using workfare as a supplementary screening device to means-testing is socially undesirable when the government objective is welfarist, namely, to ensure that all members of society will attain some minimal level of utility. Our argument suggests that when misreporting of income by welfare claimants is sufficiently manifest, introducing work requirements for welfare eligibility economizes on government expenditure and is socially desirable.

Published in: International Tax and Public Finance February 2013, Volume 20, Issue 1, pp 71-88
Jel Nos.: D6, H2, H5
Keywords: workfare, welfare, means-testing, misreporting, utility maintenance

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23-11 - Labor Migration and the Case for Flat Tax
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov

 

Working Paper #23-11
Labor Migration and the Case for Flat Tax
 
Tomer Blumkin, Efraim Sadka and Yotam Shem-Tov
In this paper we employ a tax-competition model to demonstrate that in the presence of migration the re-distributive advantage of a non-linear income tax system over a linear (flat) one is significantly mitigated relative to the autarky (no-migration) equilibrium. A coordinated shift to a flat system with its entailed administrative advantages may therefore be warranted.    

Jel Nos.: D6, H2, H5
Keywords: flat tax, re-distribution, migration, tax-competition

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22-11 -Taxing Children: The Re-distributive Role of Child Benefits - Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
 

Working Paper #22-11
Taxing Children: The Re-distributive Role of Child Benefits - Revisited
 
Tomer Blumkin, Yoram Margalioth and Efraim Sadka
In this paper, we challenge the conventional wisdom that due to the negative correlation between family size and earning ability, family size can be used as a `tagging` device, so that subsidizing children (via child allowances) enhances egalitarian objectives. We show that the case for subsidizing children crucially hinges on child allowances being provided on a universal basis. Notably, when child benefits are means-tested, taxing children at the margin (namely, setting total child benefits to decline with the number of children) is optimal under a broad class of egalitarian objectives.     

Jel Nos.: D6, H2, H5
Keywords: child allowance, re-distribution, means-testing, universal, tagging, optimal taxation.

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21-11 - An Interior Optimal Species Preservation Policy for the Two Types` Symbiotic Noah Ark
 

Shiri Shamir
 

Working Paper #21-11
An Interior Optimal Species Preservation Policy for the Two Types` Symbiotic Noah Ark
 
Shiri Shamir
Weitzman’s (1998) seminal work applied the metaphor of Noah’s ark and the related libraries model to the problem of species preservation under budget constraints. In this paper we consider the symbiotic Noah`s Ark problem with two types of species: a keystone species and a keystone-dependent species, which relies on the keystone species for survival. The central planner maximizes the expected biodiversity value under budget constraint and obtains the optimal preservation policy. One of Weitzman’s main conclusions was that under an appropriate independence assumption, an optimal policy yields an extreme outcome (almost all species either fully survive or die out). In contrast, we show that our symbiotic model with two types of species generates a unique interior optimal policy. Moreover, we find that under an interior optimal preservation policy, the expenditure on the keystone species` survival is greater than 50 of the given budget.

      
Jel Nos.: D81, O21, Q57
Keywords: optimal policy, biodiversity, symbiotic relationship, keytone species

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20-11 - Toward Increased Exchange Rate Flexibility in Central American Economies?
Leonardo Leiderman
 
 
 

 

Working Paper #20-11
Toward Increased Exchange Rate Flexibility in Central American Economies?
Leonardo Leiderman
  
 
This paper focuses on monetary and exchange rate policy in Central American Economies.  It is well known that most these economies have featured a fixed exchange rate regime, accompanied by a relatively high degree of dollarization.  As a result of that, there has been little room for domestic monetary policy autonomy.  Yet, with the overall shift in emerging market economies to a monetary policy anchored on an inflation target, and at the same time shifting away from a fixed exchange rate to a regime with some form of flexibility, there has been growing interest in analysing the potential for these policies for Central America.  Here we discuss the "initial" conditions in various countries in the region and their potential for effecting the foregoing policy shift.  The paper also summarizes Israel's experience with making a transition to inflation targeting and exchange rate flexibility and deals with its relevance for Central America.

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19-11 - The Route to Larization in Georgia
Leonardo Leiderman 

 

 

Working Paper #19-11
The Route to Larization in Georgia
Leonardo Leiderman 
               
 
This paper elaborates on the main elements to be considered in the context of a policy strategy aimed at enhancing a gradual transition of Georgia's economy from a regime of high dollarization and a relatively fixed exchange rate to a regime in which the Lari eventually becomes the key anchor for the nominal and financial system, under increased exchange-rate flexibility and an inflation-targeting based monetary policy.
One of the lessons from the recent global and financial crisis for emerging market economies is that increased nominal exchange rate flexibility and low dollarization have probably reduced the risks associated with currency mismatches, and attenuated the impact of external adverse shocks on small emerging-market economies.  These conditions enabled such economies to use domestic monetary policy as an added effective instrument for dealing with these adverse shocks, something that would not have been possible under high dollarization, a large currency mismatch between assets and liabilities, and a fixed-exchange rate regime.
 
In this paper I discuss whether there are some key pre requisites for embarking on a transition to inflation targeting and increased exchange rate flexibility, expand on issues of policy credibility, and draw some conclusions from Israel's process of "Shekelization" that are relevant for Georgia as well as other similar small open economies. 

 

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18-11 - The financial Labor supply accelerator
 
Zvi Hercowitz and Jeffrey R. Campbell

 

Working Paper #18-11
The financial Labor supply accelerator
 
Zvi Hercowitz and Jeffrey R. Campbell
The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a household`s debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum downpayment rate. Its potential macroeconomic importance comes from these labor supply fluctuations` procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data - before and after the financial deregulation of the early 1980s which reduced effective down payments - and compares the evidence with results from model-generated data. The household-level data displays positive comovement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the model`s required down payments generates a quantitatively similar weakening.

      
Jel Nos.: E24
Keywords: Borrowing Constraints, Durable Goods, Wage Shocks, Hours Worked

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17-11 -Ambiguity and the Bayesian Approach
 
Itzhak Gilboa and Massimo Marinacci
 

Forthcoming: “Ambiguity and the Bayesian Paradigm”, Advances in Economics and Econometrics: Theory and Applications, Tenth World Congress of the Econometric Society.

Working Paper #17-11
Ambiguity and the Bayesian Approach
 
Itzhak Gilboa and Massimo Marinacci
This is a survey of some of the recent decision-theoretic literature involving beliefs that cannot be quantified by a Bayesian prior. We discuss historical, philosophical, and axiomatic foundations of the Bayesian model, as well as of several alternative models recently proposed. The definition and comparison of ambiguity aversion and the updating of non-Bayesian beliefs are briefly discussed. Finally, several applications are mentioned to illustrate the way that ambiguity (or “Knightian uncertainty”) can change the way we think about economic problems.

Published in: “Ambiguity and the Bayesian Paradigm”, Advances in Economics and Econometrics: Theory and Applications, Tenth World Congress of the Econometric Society, forthcoming.

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16-11 - The Predictive Role of Counterfactuals
 
Alfredo Di Tillio, Itzhak Gilboa and L. Samuelson
 

Published in: Theory and Decision,2013, Volume 74, Issue 2, pp 167-182.

Working Paper #16-11
The Predictive Role of Counterfactuals
 
Alfredo Di Tillio, Itzhak Gilboa and L. Samuelson
We suggest a model that describes how counterfactuals are constructed and justified. The model can describe how counterfactual beliefs are updated given the unfolding of actual history. It also allows us to examine the use of counterfactuals in prediction, and to show that a logically omniscient reasoner gains nothing from using counterfactuals for prediction.

Published in: Theory and Decision,2013, Volume 74, Issue 2, pp 167-182.

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15-11 - History as a Coordination Device
 
Rosa Argenziano and Itzhak Gilboa
 

Published in: Theory and Decision,2012, Volume 73, Issue 4, pp 501-512

Working Paper #15-11
History as a Coordination Device
 
Rosa Argenziano and Itzhak Gilboa
Coordination games often have multiple equilibria. The selection of equilibrium raises the question of belief formation: how do players generate beliefs about the behavior of other players? This paper takes the view that the answer lies in history, that is, in the outcomes of similar coordination games played in the past, possibly by other players. We analyze a simple model in which a large population plays a game that exhibits strategic complementarities. We assume a dynamic process that faces different populations with such games for randomly selected values of a parameter. We introduce a belief formation process that takes into account the history of similar games played in the past, not necessarily by the same population. We show that when history serves as a coordination device, the limit behavior depends on the way history unfolds, and cannot be determined from a-priori considerations.

Published in: Theory and Decision,2012, Volume 73, Issue 4, pp 501-512

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14-11 - A Simple Model of Search Engine Pricing
 
Krif Eliaz and Ran Speigler
 

Published in: The Economic Journal, Volume 121, issue 556, pages F329–F339, November 2011.

Working Paper #14-11
A Simple Model of Search Engine Pricing
 
Krif Eliaz and Ran Speigler
We present a simple model of how a monopolistic search engine optimally determines the average relevance of ?rms in its search pool. In our model, there is a continuum of consumers, who use the search engine’s pool, and there is a continuum of ?rms, whose entry to the pool is restricted by a price-per-click set by the search engine. We show that a monopolistic search engine may have an incentive to set a relatively low price-per-click that encouarges low-relevance advertisers to enter the search pool. In general, the ratio between the marginal and average relevance in the search pool induced by the search engine’s policy is equal to the ratio between the search engine’s pro?t per consumer and the equilibrium product price. These conclusions do not change if the search engine charges ?xed access fee rather than a price-per-click.

Published in: The Economic Journal, Volume 121, issue 556, pages F329–F339, November 2011.

Keywords: search engine, internet, teo-sided markets, sequential search

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13-11- Do Highly Educated Women Choose Smaller Families?
 
Hosny Zoabi and Moshe Hazan

Published in: Article first published online, 12 AUG 2014 in the Economic Journal

 

Working Paper #13-11
Do Highly Educated Women Choose Smaller Families?
 
Hosny Zoabi and Moshe Hazan
Conventional wisdom suggests that in developed countries income and fertility are negatively correlated. We present new evidence that between 2001 and 2009 the cross-sectional relationship between fertility and women`s education in the U.S. is U-shaped. At the same time, average hours worked increase monotonically with women`s education. This pattern is true for all women and mothers to newborns regardless of marital status. In this paper, we advance the marketization hypothesis for explaining the positive correlation between fertility and female labor supply along the educational gradient. In our model, raising children and home-making require parents` time, which could be substituted by services bought in the market such as baby-sitting and housekeeping. Highly educated women substitute a significant part of their own time for market services to raise children and run their households, which enables them to have more children and work longer hours.

Published in: Article first published online, 12 AUG 2014 in the Economic Journal
http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12148/full

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12-11- Price competition under limited comparability
 
Ran Spiegler and Michele Piccione
 

Published in: The Quarterly Journal of Economics (2012) 127 (1): 97-135.

 

Working Paper #12-11
Price competition under limited comparability
 
Ran Spiegler and Michele Piccione
This article studies market competition when firms can influence consumers` ability to compare market alternatives through their choice of price “formats.” In our model, the ability of a consumer to make a comparison depends on the firms` format choices. Our main results concern the interaction between firms` equilibrium price and format decisions and its implications for industry profits and consumer switching rates. In particular, market forces drive down the firms` profits to a “constrained competitive” benchmark if and only if the comparability structure satisfies a property that we interpret as a form of “frame neutrality.” The same property is necessary for equilibrium behavior to display statistical independence between price and format decisions. We also show that narrow regulatory interventions that aim to facilitate comparisons may have an anticompetitive effect.

Published in: The Quarterly Journal of Economics (2012) 127 (1): 97-135.

Jel Nos.: C79,D03,D43

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11-11 - Search and Work in Optimal Welfare Programs
 
Ofer Setty, Nicola Pavoni and Gianluca Violante

 

Working Paper #11-11
Search and Work in Optimal Welfare Programs
 
Ofer Setty, Nicola Pavoni and Gianluca Violante

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10-11 - Unemployment Accounts
 
Ofer Setty
 

Working Paper #10-11
Unemployment Accounts
 
Ofer Setty
Unemployment Accounts (UA) are mandatory individual saving accounts that can be used by governments as an alternative to the Unemployment Insurance (UI) system. I study a two tier UA-UI system where the unemployed withdraw from their unemployment account until it is exhausted and then receive unemployment benefits. The hybrid policy provides insurance to workers more efficiently than a traditional UI because it provides government benefits selectively. Using a structural model calibrated to the US economy, I find that relative to a two tier UI system the hybrid policy leads to a welfare gain of 0.9.

      
Jel Nos.: E24; E61; J64; J65
Keywords: Unemployment Accounts; Unemployment Insurance; Job-search; Moral hazard; Mechanism Design; Optimal Policy;

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9-11 - Optimal Unemployment Insurance with Monitoring
 
Ofer Setty
 

Working Paper #9-11
Optimal Unemployment Insurance with Monitoring
 
Ofer Setty
Monitoring the job-search activities of unemployed workers is a common government intervention. I model monitoring in the optimal unemployment insurance framework of Hopenhayn and Nicolini (1997), where job-search effort is private information for the unemployed worker. In the model, monitoring provides costly imperfect information upon which the government conditions the unemployment benefits. In the optimal monitoring scheme, random monitoring, together with endogenous sanctions and rewards, create effective job-search incentives for the unemployed worker. For CRRA utility, the monitoring frequency increases and the spreads decrease with promised utility, if and only if the coefficient of risk aversion is greater than (1/2). Compared to optimal unemployment insurance, monitoring saves, at the balanced budget point, about eighty percent of the cost associated with moral hazard. The gain is achieved by a decrease of more than half in the standard deviation of consumption. 

Jel Nos.: D82, H21, J64, J65
Keywords: Recursive Contracts; Unemployment Insurance; Job Search Monitoring.

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8-11 - Talent Utilization and Search for the Appropriate Technology
 
Tali Regev and Hosny Zoabi
 

Published in: Macroeconomic Dynamics, Volume 18 Issue 04, June 2014, pp 863-882.

 

Working Paper #8-11
Talent Utilization and Search for the Appropriate Technology
 
Tali Regev and Hosny Zoabi
This paper presents a model of development that is driven by matching between talents and technologies. Differences in productivity across countries are amplified by three dimensions of talent utilization: the range of talents utilized, the density of a specific talent utilized, and the average match quality in the economy. In our model, higher productivity increases the number of technologies available, enhancing the opportunities for individuals to match their talents to specific technologies and increasing the returns to search. More intensive search further contributes to talent utilization.

Published in: Macroeconomic Dynamics, Volume 18 Issue 04, June 2014, pp 863-882.

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7-11 - Mechanisms and Impacts of Gender Peer Effects at School
 
Analia Schlosser and Victor Lavy

Published in: American Economic Journal: Applied Economics, Volume 3, Number 2, April 2011 , pp. 1-33(33).

Working Paper #7-11
Mechanisms and Impacts of Gender Peer Effects at School
 
Analia Schlosser and Victor Lavy
We present in this paper evidence about the effects and mechanisms of gender peer effects in elementary, middle, and high schools. For identification, we rely on idiosyncratic variations in gender composition across adjacent cohorts within the same schools. We find that an increase in the proportion of girls improves boys and girls` cognitive outcomes. These academic gains are mediated through lower levels of classroom disruption and violence, improved inter-student and student-teacher relationships, and lessened teachers` fatigue. We find no effect on individual behavior, which suggests that the positive effects of girls on classroom environment are mostly due to compositional change.

Published in: American Economic Journal: Applied Economics, Volume 3, Number 2, April 2011 , pp. 1-33(33).

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6-11 - Multiple Experiments for the Causal Link between the Quantity and Quality of Children
 
Analia Schlosser, Josh Angrist and Victor Lavy

Published in: Journal of Labor Economics, Vol. 28 No. 4, October 2010

Working Paper #6-11
Multiple Experiments for the Causal Link between the Quantity and Quality of Children
 
Analia Schlosser, Josh Angrist and Victor Lavy

Published in: Journal of Labor Economics, Vol. 28 No. 4, October 2010

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5-11 - Rise to the Challenge or Not to Give a Damn? Differential Performance in High vs. Low Stakes Tests
 
Analia Schlosser, Yigal Attali and Zvika Neeman
 

Working Paper #5-11
Rise to the Challenge or Not to Give a Damn? Differential Performance in High vs. Low Stakes Tests
 
Analia Schlosser, Yigal Attali and Zvika Neeman
This paper studies how different demographic groups respond to incentives by comparing performance in the GRE examination in high and low stakes situations. The high stakes situation is the real GRE examination and the low stakes situation is a voluntary experimental section of the GRE that examinees were invited to take immediately after they finished the real GRE exam. We show that males exhibit a larger difference in performance between the high and low stakes examinations than females, and that Whites exhibit a larger difference in performance between the high and low stakes examinations relative to Asians, Blacks, and Hispanics. We find that the larger differential performance between high and low stakes tests among men and whites can be partially explained by the lower level of effort invested by these groups in the low stake test.

      
Jel Nos.: J16, J24, I24, M52
Keywords: gender, competition, incentives, GRE, high stakes, low stakes, test score gap.

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4-11 - Does Sex-Selective Abortion Improve Girls Well-Being? Evidence from India
 
Analia Schlosser and Luojia Hu
 

Working Paper #4-11
Does Sex-Selective Abortion Improve Girls Well-Being? Evidence from India
 
Analia Schlosser and Luojia Hu
The paper studies the impact of prenatal sex selection on the well-being of girls by analyzing changes in children`s nutritional status and mortality during the years since the diffusion of prenatal sex determination technologies in India. We use the ratio of male to female births in the year and state in which a child was born as a proxy for parental access to prenatal sex-selection. We find that an increase in the practice of prenatal sex selection appears to be associated with a reduction in the incidence of malnutrition among girls. The negative association is stronger for girls born in rural households and at higher birth parities. We find no evidence that prenatal sex selection leads to a selection of girls into families of higher SES, however we do find some evidence of a larger reduction in family size for girls relative to boys. We also find some suggestive evidence of better treatment of girls as reflected in breastfeeding duration. On the other hand, prenatal sex selection does not appear to be associated with a reduction in excess female child mortality.

      
Jel Nos.: J13, J16, I1
Keywords: son preference, prenatal sex selection, sex ratio at birth, gender discrimination, child health.

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3-11 - How Do Employment Protection and Parental Leave Benefits Affect Mothers’ Post-Birth Careers?
 
Analia Schlosser, Rafael Lalive, Josef Zweimuller
 

Published in: Review of Economic Studies (2014) 81 (1): 219-265
 

Working Paper #3-11
How Do Employment Protection and Parental Leave Benefits Affect Mothers’ Post-Birth Careers?
 
Analia Schlosser, Rafael Lalive, Josef Zweimuller
Parental leave policies encourage mothers of newborn children to stay home and take care of their children. Two key instruments of parental leave policies are duration of job protection and benefits payments. This paper studies the causal effects of these two policy instruments on mother`s return to work decisions and their subsequent impact on mother`s labor market performance in the medium-run. To examine these issues, we exploit three different policy reforms in Austria that altered various components of the parental leave system. The policy changes were abrupt and unpredicted providing us the unique opportunity to apply a regression discontinuity research design. We find that duration of parental leave benefits is central for mothers time spent at home after child`s birth. Duration of the job-protected period while on leave also influences mother`s decisions to return to work, but to a lower extent. Yet, prolonged work interruptions due to parental leave have surprisingly little effects on mothers` earnings and employment 5 years after birth. On the other hand, there seems to be a detrimental effect on earnings and employment for women of high earnings capacity when their work interruptions exceed the period of job-protected leave.

Published in: Review of Economic Studies (2014) 81 (1): 219-265
Jel Nos.: J13, J18, J22
Keywords: Parental leave, family and work obligations, return to work, labor supply, earnings, family earnings gap.

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2-11 - Working Hard or Working Smart? Monetary Incentives and Cognitive Abilities
 
Anat Bracha and Chaim Fershtman
 

Published in: Management Science, April 2013 vol. 59 no. 4 771-781
 

Working Paper #2-11
Working Hard or Working Smart? Monetary Incentives and Cognitive Abilities
 
Anat Bracha and Chaim Fershtman
Almost all jobs require a combination of cognitive effort and labor effort. This paper focuses on the effect that competitive incentive schemes have on the chosen combination of these two types of efforts. We use an experimental approach to show that competitive incentives may induce agents to work harder but not necessarily smarter. This effect was stronger for women.

Published in: Management Science, April 2013 vol. 59 no. 4 771-781

Keywords: behavioral economics, individual decision making, lab experiment, competitive incentives, work effort.

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1-11 - Income Distribution, Product Quality and international Trade
 
Pablo Fajgelbaum, Gene M. Grossman and Elhanan Helpman
 

Working Paper #1-11
Income Distribution, Product Quality and international Trade
 
Pablo Fajgelbaum, Gene M. Grossman and Elhanan Helpman
We develop a framework for studying trade in vertically and horizontally differentiated products. In our model, consumers with heterogeneous incomes and tastes purchase a homogeneous good as well as making a discrete choice of quality and variety of a differentiated product. The distribution of preferences in the population generates a nested logit demand structure. These demands are such that the fraction of consumers who buy a higher-quality product rises with income. We use the model to study the pattern of trade between countries that differ in size and income distributions but are otherwise identical. Trade?which is driven primarily by demand factors?derives from ``home market effects`` in the presence of transport costs. The model helps to explain why richer countries export higher-quality goods. It provides a tractable tool for studying the welfare consequences of trade, transport costs, and trade policy for different income groups in an economy.

Jel Nos.: F12
Keywords: monopolistic competition, vertical specialization, product quality, nested logit.

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