The Economic Journal

Abraham, Filip; Bormans, Yannick; Konings, Jozef; Roeger, Werner

2024 The Economic Journal

doi: 10.1093/ej/ueae037

This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (−5.9%) in the past three decades due to a combination of falling fixed costs (−4.0%) and decreasing excess profits (−1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.

Battiston, Giacomo; Daniele, Gianmarco; Le Moglie, Marco; Pinotti, Paolo

2024 The Economic Journal

doi: 10.1093/ej/ueae047

We show that the Mexican war on drugs pushed drug cartels into large-scale oil theft. We propose a simple model in which government crackdowns on one criminal sector induce criminal organisations to invest in a new sector. When entering the new sector, challenger organisations with a residual share of the market in the traditional sector may leapfrog incumbent organisations. We bring the model to the data using detailed information on drug cartel presence, oil pipelines and illegal oil taps across Mexican municipalities. In line with the model predictions, municipalities with oil pipelines witnessed a greater increase in cartel presence than municipalities without pipelines after the crackdown on drugs, and the effect is driven by challenger criminal groups. Within the subset of municipalities with oil pipelines, we observe more illegal oil taps where the political party in favour of anti-drug trafficking policy won local elections by a small margin. Because of specialisation in different criminal sectors, municipalities with pipelines did not witness a surge in violence, but they did experience a decline in socioeconomic conditions.

Carayol, Nicolas; Jackson, Matthew O

2024 The Economic Journal

doi: 10.1093/ej/ueae045

Consumers, businesses and organisations rely on others’ ratings of items when making choices. However, individual reviewers vary in their accuracy and some are biased—either systematically over- or under-rating items relative to others’ tastes, or even deliberately distorting a rating. We describe how to process ratings by a group of reviewers over a set of items and evaluate the individual reviewers’ accuracies and biases, in a way that yields unbiased and consistent estimates of the items’ true qualities. We provide Monte Carlo simulations that showcase the added value of our technique even with small data sets, and we show that this improvement increases as the number of items increases. Revisiting the famous 1976 wine tasting that compared Californian and Bordeaux wines, accounting for the substantial variation in reviewers’ biases and accuracies results in a ranking that differs from the original average rating. We also illustrate the power of this methodology with an application to more than 45,000 ratings of ‘en primeur’ Bordeaux fine wines by expert critics. Those data show that our estimated wine qualities significantly predict prices when controlling for prominent experts’ ratings and numerous fixed effects. We also find that the elasticity of a wine price in an expert’s ratings increases with that expert’s accuracy.

Escobar Carias, Michelle; Johnston, David W; Knott, Rachel; Sweeney, Rohan

2024 The Economic Journal

doi: 10.1093/ej/ueae036

Does temperature affect decision-making abilities and rationality? Using Indonesian data, we estimate how risky choices, impatience and rational choice violations vary with exposure to temperature. We show that hot weather temporarily increases rational choice violations and impatience, but does not affect risk-related decisions. These effects are primarily driven by nighttime rather than daytime temperatures. We provide suggestive evidence that the mechanism behind these effects is decreased sleep quality, affecting cognition the following day, particularly math skills. These skills are critical for rational and utility-maximising decision-making. Effects are largest for economically disadvantaged households and in areas with low rates of air-conditioning.

Dimant, Eugen; Krieger, Tim; Meierrieks, Daniel

2024 The Economic Journal

doi: 10.1093/ej/ueae034

How does anti-American terrorism in recipient countries respond to US military aid? Does aid protect United States interests abroad or does it have unintended consequences for US security? To answer these questions, we estimate the effect of US military aid on anti-American terrorism in recipient countries for a sample of 174 countries between 1968 and 2018. We find that higher levels of aid especially for military financing and education are associated with a higher likelihood of anti-American terrorism in aid-receiving countries. Examining potential transmission channels, we show that more US military aid correlates with lower military capacity and increases in corruption and exclusionary policies in recipient countries. Our findings are consistent with the argument that military aid aggravates local grievances, creating anti-American resentment and leading to anti-American terrorism. Indeed, we also provide tentative evidence that US military aid is associated with lower public opinion about the United States in recipient countries.

Gerster, Andreas; Lamp, Stefan

2024 The Economic Journal

doi: 10.1093/ej/ueae048

This paper investigates the impact of a large electricity tax exemption on production levels, employment and input choices in the German manufacturing industry. For two policy designs, we show that exempted plants increase their electricity use. This effect is larger under a notched exemption policy, where passing an eligibility threshold yields infra-marginal benefits, compared to a policy without such benefits. We detect no significant impact of the exemptions on production levels, export shares and employment. Using counterfactual simulations, we document that notched policies substantially distort firms’ production input choices when financial stakes are high and compliance costs are low.

Grossmann, Volker; Schünemann, Johannes; Strulik, Holger

2024 The Economic Journal

doi: 10.1093/ej/ueae038

We study the optimal design of a fair public pension system in a multi-period overlapping generations model with occupation-specific morbidity and mortality that depends on the retirement age. The fairness constraint acts as institutional device ensuring that lifetime returns to contributions are equal across occupational groups. We consider group-specific replacement rates and a calculatory interest rate for early contributions as policy instruments. Calibrating the model to Germany, we find that the transition to optimal fair pension policies may induce early retirement of blue-collar workers and significantly raises their lifetime pension benefits and welfare. Aggregate welfare increases in all fair pension scenarios.

Guo, Naijia; Wang, Shuangxin; Zhang, Junsen

2024 The Economic Journal

doi: 10.1093/ej/ueae049

This study estimates the direct and spillover effects of a free education programme on educational outcomes in rural China. We find that, although the programme encourages more eligible children to attend secondary school, it also leads to a decrease in high school enrolment among ineligible girls with eligible siblings, as they are more likely to choose work instead. In the long run, males exposed to free education have more years of schooling than their non-exposed counterparts. However, such effect is not found among females. This disparity suggests that a gender-neutral policy may have an asymmetric effect between males and females because of spillover effects through intra-household resource allocation.

Kerkhof, Anna

2024 The Economic Journal

doi: 10.1093/ej/ueae043

Many media outlets depend on advertising revenue to finance their operations, but the effect of advertising on media outlets’ content choices is largely unexplored. This paper exploits two institutional features from YouTube to show that an exogenous increase in the feasible amount of advertising induces YouTubers to differentiate their video content from their competitors. A plausible mechanism is that YouTubers avoid competition: viewers typically perceive advertising as a nuisance and therefore as an implicit price they have to pay; thus, they could switch to a competitor if a YouTuber increased her advertising quantity. This is less likely, however, if the YouTuber differentiates her content from the mainstream and moves to a niche.

Orhun, Yeşim; Cohn, Alain; Raymond, Collin B

2024 The Economic Journal

doi: 10.1093/ej/ueae033

We provide field evidence that individuals engage in motivated optimism in the face of impending risk. Congruent with a dynamic anticipatory utility model, we demonstrate that belief distortions are time and stake dependent. Our study leverages variation in the time span between the survey and the externally imposed date when workers are required to return to their workplaces during the COVID-19 pandemic. We show that, as the work return date approaches, individuals become relatively more optimistic about the increased infection risk associated with going back to the workplace, and about how severely their health may be impacted if they get infected. Belief distortions are larger among those facing potential health complications conditional on infection. Our results are informative about when and for whom interventions will be most effective.