The Economic Journal

Moll, Benjamin

doi: 10.1093/ej/ueaf104pmid: N/A

The thesis of this essay is that, in heterogeneous agent macroeconomics, the assumption of rational expectations about equilibrium prices is unrealistic and should be replaced. Rational expectations imply that decision-makers forecast equilibrium prices like interest rates by forecasting cross-sectional distributions. This leads to an extreme version of the curse of dimensionality: dynamic programming problems in which the entire distribution is a state variable (the ‘Master equation’, also known as the ‘Monster equation’). Frontier computational methods struggle with these infinite-dimensional Bellman equations, making it implausible that real-world agents solve the associated decision problems. These difficulties also limit the applicability of the heterogeneous agent approach to central questions in macroeconomics—those involving aggregate risk and non-linearities such as financial crises. This troublesome feature of the rational expectations assumption poses a challenge: what should replace it? I outline three criteria for alternative approaches: (1) computational tractability, (2) consistency with empirical evidence and (3) (some) immunity to the Lucas critique. I then discuss several promising directions, including temporary equilibrium approaches, incorporating survey expectations, least-squares learning and reinforcement learning.

Schilling, Pia; Höckel, Lisa Sofie

doi: 10.1093/ej/ueaf087pmid: N/A

We study the effect of separate preparatory language learning classes on the academic outcomes of primary school-aged immigrant children in Germany compared to their direct integration into regular classrooms. Using administrative panel data and leveraging idiosyncratic assignment of refugee children to neighbourhoods, and, consequently, schools, as well as preparatory class roll out over time, we find that primary school-aged refugees attending a preparatory class perform significantly worse on fifth-grade standardised tests and are slightly less likely to pursue an academic secondary track. While limited to short-term outcomes, our results indicate that preparatory classes could impede early academic integration by clustering migrant peers, highlighting the need to consider complementary approaches to reduce achievement disparities.

Berg, Petter; Romero, Mauricio; Singh, Abhijeet

doi: 10.1093/ej/ueaf089pmid: N/A

We study the relative productivity of private and public institutions at the preschool and primary school levels using panel data from 215 villages in Tamil Nadu. Private preschools show higher test score value-added in math and language (${\sim} 0.59 \!-\!0.74\sigma\!$) and outperform government providers in nearly all villages. This productivity difference explains 60% of the socioeconomic test score gap before school entry. These results contrast starkly with primary schooling, where we find no evidence of a private-sector premium in math and negative effects in local language. Test score value-added is positively correlated between private and government options in a village, both at the preschool and primary school levels. Quality is also correlated across levels; villages with more productive primary schools also tend to have more productive preschools. Our findings inform debates on achieving universal foundational skills and highlight the need to improve the quality of preschools available to lower-income families.

Koethenbuerger, Marko; Naguib, Costanza; Stettler, Christian; Stimmelmayr, Michael

doi: 10.1093/ej/ueaf090pmid: N/A

We provide quasi-experimental evidence on the income tax-induced residential mobility of foreign high-income households living in Switzerland by exploiting the differential tax treatment of UK and US households. While the two groups are similar in terms of non-tax sorting preferences, US households are effectively insulated from Swiss income taxation due to the US worldwide income tax system. Thus, they provide the control group for the UK households, our treatment group. Comparing the residential choices of the two groups within a forty-five-minutes commuting zone of Zurich, we robustly find a residential location elasticity with respect to the net-of-tax rate of around eight. This estimate captures the ‘pure’ income tax effect on residential choice, not being downward biased by non-tax location incentives (that positively correlate with income taxes) and, for instance, by coordination costs between job and residential choices.

Capra, Monica; Tasoff, Joshua; Xu, Jin

doi: 10.1093/ej/ueaf091pmid: N/A

People face a fundamental trade-off between savouring consumption in the present and processing information. Both require attention, which is limited. As a result, directing attention to one necessarily comes at the expense of the other. We study this attentional opportunity cost, focusing on cases where information concerns potentially distressing future outcomes. Across four experiments, we find that higher present consumption reduces demand for such information and increases willingness to pay for risk mitigation. These findings have implications for models of anticipatory utility, self-regulation under limited attention and the political economy of distraction—helping to explain, for instance, why political actors might suppress demand for information by offering ‘bread and circuses’.

Mansfield, Richard K

doi: 10.1093/ej/ueaf092pmid: 42109575

This paper examines how spatial frictions that differ among heterogeneous workers and establishments shape the geographic and demographic incidence of alternative local labour demand shocks, with implications for the appropriate level of government at which to fund local economic initiatives. Longitudinal Employer-Household Dynamics data featuring millions of job transitions facilitate estimation of a rich two-sided labour market assignment model. The model generates simulated forecasts of many alternative local demand shocks featuring different establishment compositions and local areas. Workers within 10 miles receive only 11.2% (6.6%) of nationwide welfare (employment) short-run gains, with at least 35.9% (62.0%) accruing to out-of-state workers, despite much larger per-worker impacts for the closest workers. Local incidence by demographic category is very sensitive to shock composition, but different shocks produce similar demographic incidence further from the shock. Furthermore, the remaining heterogeneity in incidence at the state or national level can reverse patterns of heterogeneous demographic impacts at the local level. Overall, the results suggest that reduced-form approaches using distant locations as controls can produce accurate estimates of local shock impacts on local workers, but that the distribution of local impacts badly approximates shocks’ statewide or national incidence.

Huang, Wei; Liu, Qingfeng; Xing, Jianwei; Zheng, Shilin

doi: 10.1093/ej/ueaf093pmid: N/A

This study leverages personnel system reforms within economics departments at Chinese universities to assess the impact of the tenure-track system on research productivity. Using individual-level data on faculty members, we show that tenure-track faculty produce 0.135 (or 100%) more publications in high-quality journals annually during their probationary period compared to faculty hired under the traditional personnel system. Our findings suggest that this increase in productivity is driven by the recruitment of high-potential researchers, heightened pressure due to performance-based employment risks and enhanced incentives, including higher salaries and increased research funding. Moreover, we observe that the varied implementation details influence the actual effects of the reform. Overall, the university tenure-track reform has been a significant contributor to the increased productivity in Chinese economic research.

Faravelli, Marco; Khalil, Umair; Ponnusamy, Sundar

doi: 10.1093/ej/ueaf094pmid: N/A

A procedural rule in Indian elections requires candidates to pay a nominal deposit, which is forfeited on obtaining fewer than one-sixth of the votes. Forfeiture diminishes female recontesting by 13.3 percentage points in the following election (relative effect size of 68%). We find no such effects for men. These effects are persistent and discourage female candidates in the long term as well. States with more regressive gender norms exhibit stronger findings, with female forfeiters also being 11.8 percentage points less likely to win the following election. We enhance our analysis by conducting a survey experiment with representative voters.

Calì, Massimiliano; Presidente, Giorgio

doi: 10.1093/ej/ueaf095pmid: N/A

This paper unveils a novel externality of product market regulation in the labour market. It shows theoretically and empirically that higher barriers to entry in product markets translate into higher employers’ labour market power, measured by the wage markdown—the ratio between the marginal product of labour and the wage. Using quasi-exogenous variation in investment restrictions across 389 manufacturing product markets in Indonesia, the analysis finds that wage markdowns would have been almost 10% lower without restrictions and workers would have earned a larger fraction of their marginal product. The analysis supports the model’s prediction that lower entry is the main driver of the positive relationship between investment restrictions and wage markdowns, and that restrictions increase markdowns more in commuting zones where employers have already substantial labour market power. The restrictions do not affect employment, consistent with recent models based on search frictions and wage bargaining, but not with classical monopsony models.

Meng, Juanjuan; Wang, Hui; Yang, Yu (Alan); Zhang, Mingshan

doi: 10.1093/ej/ueaf096pmid: N/A

Low fertility presents a major challenge for many nations. We study whether restricting competition-driven private tutoring can enhance fertility intentions by analysing China’s 2021 private tutoring ban. Using nationwide surveys, we elicit respondents’ fertility intentions under scenarios with and without the policy. The tutoring ban significantly increases expected total fertility by 7%–8%, with larger effects in cities under greater policy intensity. Decomposition reveals that the primary driver is perceived reduction in educational competition, followed by improved parental health, parent-child relationships, and reduced time and monetary costs. We also find consistent results on actual birth rates three years after the policy.