Cambridge Working Papers in Economics (CWPE)
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Cambridge Working Papers in Economics (CWPE) is a new series of papers from the Faculty of Economics and the Department of Applied Economics. It supersedes the DAE Working Paper series.
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Please note the Working Papers often represent early stages in the presentation of research findings, and should not be quoted without permission.
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Item Open Access Preprint Should the EU ETS be extended to road transport and heating fuels?(2024-02-09) Pollitt, M. G.; Dolphin, G. GThis paper considers the current proposal to extend the EU ETS to cover CO2 emissions from the combustion of heating and road transport fuels. We argue that increased coverage of the EU ETS, together with a binding cap consistent with a net zero trajectory, would be a powerful dynamic incentive to efficient emissions reduction. In addition, it would complement standards-based policies currently enacted in these sectors in several ways. Distributional implications remain a serious challenge to such an extension but several mechanisms are available to alleviate them.Item Open Access Preprint The Pro-Competitive Effects of Trade Agreements(Faculty of Economics, University of Cambridge, 2022-06-23) Crowley, M. A.; Han, L.; Prayer, T.How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle-income countries, we document that tariff reductions under trade agreements have strong pro-competitive effects - they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm's optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tari-induced reallocation of market share among firms and across countries.Item Open Access Preprint Persistence and Historical Evidence: The Example of the Rise of the Nazi Party(2022-12-12) Guinnane, T. W.; Hoffman, P.The persistence literature in economics and related disciplines connects recent outcomes to events long ago. Although this influential literature is promising, it raises serious questions about how to distinguish deep causal factors that persist across time from alternative explanations derived from the rapidly changing historical context or misuse of historical sources. We discuss two prominent examples that ground the rise of the Nazi Party in distant historical roots. Several econometric, analytical, and historical errors undermine the papers’ contention that deeply rooted culture and social capital fuelled the Nazi rise. The general lesson for persistence studies is that beyond careful econometrics and serious consideration of underlying mechanisms (including formal theory), they must pay scrupulous attention to the historical context and the limitations of historical data.Item Open Access Preprint The Hidden Toll of the Pandemic: Excess Mortality in non-COVID-19 Hospital Patients(2022-09-09) Fetzer, T.; Rauh, C.; Schreiner, C.COVID-19 drastically increased demand- and supply pressures faced by healthcare systems. Increased pressures may have negative spillovers into non COVID-19 care which can cause preventable excess deaths among patients seeking medical help for reasons unrelated to COVID-19. This paper finds substantial and robust evidence of such non COVID-19 excess deaths among hospital patients leveraging data from an integrated public healthcare system: the NHS in England. We find that there is at least one additional preventable death among hospital patients seeking medical help for reasons unrelated to COVID-19 for every 30 deaths that can be linked to COVID-19. In aggregate, there were 4,003 such excess deaths during the first twelve months of the pandemic. At the healthcare provider level, the increase in non COVID-19 excess deaths is sharply increasing in COVID-19 induced pressures on hospitals.Item Open Access Preprint Target Setting in Contests with Sabotage(2024-02-29) Chung, A.We study a novel target prize contest between two heterogeneous contestants featuring sabotage. The contestants first choose a target prize should they win the contest, then exert two types of effort: (i) productive effort which directly enhances their performance; and (ii) destructive effort which reduces the opponent’s performance. While both types of effort incur constant marginal costs (in the respective levels of effort), the productive effort’s marginal cost is an increasing function of the target prize. We show that when contestants are allowed to choose their own target prize, they do not sabotage each other in any subgame perfect equilibrium.Item Open Access Preprint Interconnected Conflict(2024-02-21) Dziubiński, M.; Goyal, S.; Zhou, J.We study a model of conflict with multiple battlefields and the possibility of investments spillovers between the battlefields. Results of conflicts at the individual battlefields are determined by the Tullock contest success function based on efforts assigned to a battlefield as well as efforts spilling over from the neighbouring battlefields. We characterize Nash equilibria of this model and uncover a network invariance result: equilibrium payoffs, equilibrium total expenditure, and equilibrium probabilities of winning individual battlefields are independent of the network of spillovers. We show that the network invariance holds for any contest success function that is homogeneous of degree zero and has the no-tie property. We define a network index that characterizes equilibrium efforts assignments of the players. We show that the index satisfies neighbourhood inclusion and can, therefore, be considered a network centrality.Item Open Access Preprint Forecasting Epidemic Trajectories: Time Series Growth Curves Package tsgc(2024-02-12) Ashby, M.; Harvey, A.; Kattuman, P.; Thamotheram, C.This paper documents the Time Series Growth Curves (tsgc) package for R, which is designed for forecasting epidemics, including the detection of new waves and turning points. The package implements time series growth curve methods founded on a dynamic Gompertz model and can be estimated using techniques based on state space models and the Kalman filter. The model is suitable for predicting future values of any variable which, when cumulated, is subject to some unknown saturation level. In the context of epidemics, the model can adjust to changes in social behavior and policy. It is also relevant for many other domains, such as the diffusion of new products. The tsgc package is demonstrated using data on COVID-19 confirmed cases.Item Open Access Preprint High-Dimensional Forecasting with Known Knowns and Known Unknowns(2024-02-06) Pesaran, M. H.; Smith, R. P.Forecasts play a central role in decision making under uncertainty. After a brief review of the general issues, this paper considers ways of using high-dimensional data in forecasting. We consider selecting variables from a known active set, known knowns, using Lasso and OCMT, and approximating unobserved latent factors, known unknowns, by various means. This combines both sparse and dense approaches. We demonstrate the various issues involved in variable selection in a high-dimensional setting with an application to forecasting UK inflation at different horizons over the period 2020q1-2023q1. This application shows both the power of parsimonious models and the importance of allowing for global variables.Item Open Access Preprint Marginal Curtailment of Wind and Solar PV: Transmission Constraints, Pricing and Access Regimes for Efficient Investment(2024-02-09) Newbery, D.; Biggar, D.As Variable Renewable Energy (VRE) penetration increases in poorly networked areas with suitable VRE resources, transmission constraints will increasingly force VRE curtailment. Under most European market access and pricing arrangements, location and operation decisions are based on average curtailment rates. As the marginal contribution of the last MW of VRE is 3+ times average curtailment, there is a risk of inefficient location and operation. This article compares different pricing and access regimes (including nodal pricing that gives efficient transmission scarcity signals) to compare their impact on the incentives for VRE merchant or market driven entry.Item Open Access Preprint Do Religious People Cope Better in a Crisis? Evidence from the UK Pandemic Lockdowns(2024-01-30) Iyer, S.; Larcom, S.; She, P-W.We measure whether religious people in the UK cope better during a large negative shock - the nationwide pandemic lockdowns. We use data from the Understanding Society longitudinal dataset, including self-reports on religion and religiosity taken before the pandemic, and mental health data on unhappiness and depression, collected both before and during the lockdown periods. We find evidence that religious people coped better during the lockdowns. In terms of magnitude, we found that religious people (in that it makes a difference to their life) were around one-fifth less likely to suffer an increase in unhappiness or depression. Our results for those who belong to a religion (regardless if it makes a difference to their life) were higher in magnitude, but lower in significance. We found little difference in coping across religions; with the results for Christians, Muslims and Hindus all being broadly similar. However, we did find some difference within Christian denominations, with ‘Christian Other’ (those belonging to mainly Protestant churches other than the Church of England) coping relatively worse among those who belong to a religion. We also found that when places of worship were closed, religious Muslims and Catholics suffered disproportionately - the two religious groups from our study that normally require weekly communal attendance from their followers.Item Open Access Preprint Introducing a Global Dataset on Conflict Forecasts and News Topics(2024-02-02) Mueller, H.; Rauh, C.; Seimon, B.This article provides a structured description of openly available news topics and forecasts for armed conflict at the national and grid cell level starting January 2010. The news topics as well as the forecasts are updated monthly at conflictforecast.org and provide coverage for more than 170 countries and about 65,000 grid cells of size 55x55km worldwide. The forecasts rely on Natural Language Processing (NLP) and machine learning techniques to leverage a large corpus of newspaper text for predicting sudden onsets of violence in peaceful countries. Our goals are to: a) support conflict prevention efforts by making our risk forecasts available to practitioners and research teams worldwide, b) facilitate additional research that can utilise risk forecasts for causal identification, and to c) provide an overview of the news landscape.Item Open Access Preprint Experimental Evidence on Group Size Effects in Network Formation Games(2024-03-26) Choi, S.; Goyal, S.; Guo, F.; Moisan, F.This paper presents experimental evidence on games where individuals can unilaterally decide on their links with each other. Linking decisions give rise to directed graphs. We consider two classes of situations: one, benefits flow along the direction of the network paths (one-way flow), and two, when the benefits flow on network paths without regard to the direction of links (two-way flow). Our experiments reveal that in the one-way flow model subjects create sparse networks whose distance grows and efficiency falls as group size grows; by contrast, in the two-way flow model subjects create sparse and small world networks whose efficiency remains high in both small and large groups. We show that a bounded rational model that combines myopic best response with targeting a most connected individual provides a coherent account of our experimental data.Item Open Access Preprint Uncovering the Sources of Cross-border Market Segmentation: Evidence from the EU and the US(2024-03-11) Hoste, J.; Verboven, F.We develop a new approach to measure the sources of cross-border goods market segmentation. Our cost-of-living approach uncovers the relative importance of price and product availability differences, while accounting for taste differences. We implement our methodology on regionally disaggregated consumer goods data in the EU and US. The analysis reveals that price, and especially, product availability differences are much larger between than within European countries, and are only marginally larger between than within US states. Our findings imply that US states are geographically integrated, whereas EU countries remain segmented, due to trade frictions that mainly relate to fixed costs.Item Open Access Preprint Structural Change at a Disaggregated Level: Sectoral Heterogeneity Matters(2024-03-14) Sen, A.I analyze a disaggregated structural change model for the US economy in the post-Second World War period. My results reveal that the positive correlation between the relative price and the relative quantity of services with respect to goods, a fact that challenges CES preferences commonly used in the structural change literature, largely reflects the heterogeneous makeup of the services sector. I show that a preference specification where service industries with high productivity growth (progressive services) are separated from the rest of services can account for this positive correlation without any income effects. Consistent with the development facts, the disaggregated structural change model I consider implicates a hump for the relative price of investment. Regarding structural change in investment, the results of the disaggregated model differ from the existing literature. More specifically, the price of services relative to goods declines over time and the rise of the services sector in investment reflects the substitutability between goods and services.Item Open Access Preprint Social Structure, State, and Economic Activity(2024-03-24) Bramoulle, Y.; Goyal, S.; Morelli, M.Most societies in the world contain strong group identities and the culture supporting these groups is highly persistent. This persistence in turn gives rise to a practical problem: how do and should societies with strong group identities organize themselves for exchange and public good provision? In this paper, we develop a theoretical framework – with social structure characterized by number and size of groups as well as quality of ties between them – that allows us to study, normatively and positively, the relationship between social structure, state capacity, and economic activity.Item Open Access Preprint Status Consumption in Networks: A Reference Dependent Approach(2024-03-12) Bramoullé, Y.; Ghiglino, C.We introduce loss aversion into a model of conspicuous consumption in networks. Agents allocate heterogeneous incomes between a conventional good and a status good. They interact over a connected network and compare their status consumption to their neighbors’ average consumption. We find that aversion to lying below the social reference point has a profound impact. If loss aversion is large relative to income heterogeneity, a continuum of conformist Nash equilibria emerges. Agents have the same status consumption, despite differences in incomes and network positions, and the equilibrium is indeterminate. Otherwise, there is a unique Nash equilibrium and status consumption depends on the interplay between network positions and incomes. Our analysis extends to homothetic and heterogeneous preferences.Item Open Access Preprint The Swift Decline of the British Pound: Evidence from UK Trade-invoicing after the Brexit Vote(2024-03-11) Crowley, M. A.; Han, L.; Son, M.Using administrative transactions data from the United Kingdom, we document a swift decline in sterling use among British exporters after the 2016 Brexit vote. Through a novel decomposition, we document most of this decline comes from two sources: (i) continuously-operating firms switching from sterling to dollars or local currencies and (ii) reductions in transactions for sterling-loyal firms. In contrast, new entrants into exporting primarily invoice in sterling before and after the Brexit vote. Our findings provide the first evidence on the quantitative relevance of new channels that contribute to changes in aggregate invoicing shares amidst political upheaval.Item Open Access Preprint Movies(2024-03-11) Michalopoulos, S.; Rauh, C.Why are certain movies more successful in some markets than others? Are the entertainment products we consume reflective of our core values and beliefs? These questions drive our investigation into the relationship between a society’s oral tradition and the financial success of films. We combine a unique catalog of local tales, myths, and legends around the world with data on international movie screenings and revenues. First, we quantify the similarity between movies’ plots and traditional motifs employing machine learning techniques. Comparing the same movie across different markets, we establish that films that resonate more with local folklore systematically accrue higher revenue and are more likely to be screened. Second, we document analogous patterns within the US. Google Trends data reveal a pronounced interest in markets where ancestral narratives align more closely with a movie’s theme. Third, we delve into the explicit values transmitted by films, concentrating on the depiction of risk and gender roles. Films that promote risk-taking sell more in entrepreneurial societies today, rooted in traditions where characters pursue dangerous tasks successfully. Films portraying women in stereotypical roles continue to find a robust audience in societies with similar gender stereotypes in their folklore and where women today continue being relegated to subordinate positions. These findings underscore the enduring influence of traditional storytelling on entertainment patterns in the 21st century, highlighting a profound connection between movie consumption and deeply ingrained cultural narratives and values.Item Open Access Preprint The Effect of Stock Splits on Liquidity in a Dynamic Model(2024-03-01) Hafner, C. M.; Linton, O. B.; Wang, L.We develop a dynamic framework to detect the occurrence of permanent and transitory breaks in the illiquidity process. We propose various tests that can be applied separately to individual events and can be aggregated across different events over time for a given firm or across different firms. In an empirical study, we use this methodology to study the impact of stock splits on the illiquidity dynamics of the Dow Jones index constituents and the effects of reverse splits using stocks from the S&P 500, S&P 400 and S&P 600 indices. Our empirical results show that stock splits have a positive and significant effect on the permanent component of the illiquidity process while a majority of the stocks engaging in reverse splits experience an improvement in liquidity conditions.Item Open Access Preprint Estimating a Density Ratio Model for Stock Market Risk and Option Demand(2024-03-05) Dalderop, J.; Linton , O. B.Option-implied risk-neutral densities are widely used for constructing forward-looking risk measures. Meanwhile, investor risk aversion introduces a multiplicative pricing kernel between the risk-neutral and true conditional densities of the underlying asset’s return. This paper proposes a simple local estimator of the pricing kernel based on inverse density weighting, and characterizes its asymptotic bias and variance. The estimator can be used to correct biased density forecasts, and performs well in a simulation study. A local exponential linear variant of the estimator is proposed to include conditioning variables. In an application, we estimate a demand-based model for S&P 500 index options using net positions data, and attribute the U-shaped pricing kernel to heterogeneous beliefs about conditional volatility.