Items where Subject is "Economics"

Are individuals more sensitive to losses than gains in terms of economic growth? We find that measures of subjective well-being are more than twice as sensitive to negative as compared to positive economic growth. We use Gallup World Poll data from over 150 countries, BRFSS data on 2.3 million US respondents, and Eurobarometer data that cover multiple business cycles over four decades. This research provides a new perspective on the welfare cost of business cycles, with implications for growth policy and the nature of the long-run relationship between GDP and subjective well-being.

We investigate the importance of firm-bank relationships for the international transmission of bank distress to the real economy. Using a large panel of matched financial statements of firms of all sizes and their relationship banks in Germany, we find that banks with losses from proprietary trading activities during the 2007/8 financial crisis decreased their lending, and that their firm customers responded by reducing real investment and employment. We document how different types of firms partially offset reduced credit supply by resorting to alternative financing sources.

We identify and document a new principle of economic behavior: the principle of the Malevolent Hiding Hand. In a famous discussion, Albert Hirschman celebrated the Hiding Hand, which he saw as a benevolent mechanism by which unrealistically optimistic planners embark on unexpectedly challenging plans, only to be rescued by human ingenuity, which they could not anticipate, but which ultimately led to success, principally in the form of unexpectedly high net benefits. Studying eleven projects, Hirschman suggested that the Hiding Hand is a general phenomenon. But the Benevolent Hiding Hand has an evil twin, the Malevolent Hiding Hand, which blinds excessively optimistic planners not only to unexpectedly high costs but also to unexpectedly low net benefits. Studying a much larger sample than Hirschman did, we find that the Malevolent Hiding Hand is common and that the phenomenon that Hirschman identified is rare. This sobering finding suggests that Hirschman’s phenomenon is a special case; it attests to the pervasiveness of the planning fallacy, writ very large. One implication involves the continuing need to de-bias decisions and decision support tools like cost-benefit analysis; another is that accountability for decision makers, planners, and forecasters is required for such de-biasing to be effective and lasting.

Cooperation in the form of vote trading, also known as logrolling,is central for law-making processes, shaping the development of democratic societies. Empirical evidence of logrolling is scarce and limited to highly specific situations because existing methods are not easily applicable to broader contexts. We have developed a general and scalable methodology for revealing a network of vote traders, allowing us to measure logrolling on a large scale. Analysis on more than 9 million votes spanning 40 years in the U.S. Congress reveals a higher logrolling prevalence in the Senate and an overall decreasing trend over recent congresses, coincidental with high levels of political polarization. Our method is applicable in multiple contexts, shedding light on many aspects of logrolling and opening new doors in the study of hidden cooperation.

Subsidies for renewable energy sources are increasing around the globe and amounted to more than 100 billion euro in 2013. This study aims to answer whether the subsidies only ensure that green electricity plants are profitable or whether other market participant - as, for example, landowners - benefit from the subsidy in the form of windfall gains as well. To identify the causal impact of the subsidies, we investigate the impact of the introduction of a price guarantee in the form of a feed-in tariff for wind electricity in Germany on land prices. We employ two different approaches. Both approaches exploit quasi-experimental variation in wind strength across 260 non-urban counties in combination with the introduction of the subsidies. Based on a difference-in-differences design, we find that land prices increased by roughly 1,100 euro in high-wind areas after the introduction of the subsidy. Using an instrumental variable estimator pins down that around 18% of expected wind turbine profits are capitalized into land prices. Further, we show that wind turbine subsidies account for 4% of overall agricultural income in 2007.

The post-2008 period focused attention on "twin-crises". Banking crises may lead to sovereign crises where fiscal vulnerabilities are exacerbated by the extension of support for the banking system. We develop a model that describes private sector generated capital inflow that is used to finance investment and consumption expenditure. In the event of an economic contraction, the (convex) haircut on outstanding debt is negotiated, or bargained, centrally by the sovereign. Two results arise: the volume of debt and haircut rate are inefficient. In this setting the accumulation of capital achieves two goals. First, it generates sufficient optimism about future income to allow the debt market to function. Second, and counter-intuitively, it increases expected haircuts by raising the value of the outside option of complete default. These competing forces characterize the optimal balanced-budget macroprudential policy targeting capital investment.