Play Money
Political Parties Do Matter in U.S. Cities ... For Their Unfunded Pensions
Christian Dippel
American Economic Journal: Economic Policy, forthcoming
Abstract:
This paper studies public-sector pension obligations, the biggest fiscal challenge currently facing many U.S. cities. Employing a regression discontinuity design around close elections, benefit payments out of a city's public-sector pensions are shown to grow faster under Democratic-party mayors, while contributions into the pensions do not. Previous research showed that parties do not matter for a wide range of cities' fiscal expenditures, and explained this with voters imposing fiscal discipline. This paper replicates previous results, but shows that parties can matter for shrouded expenditure types that voters do not pay attention to, especially if they benefit well-organized interest groups.
Cyber risk and the U.S. financial system: A pre-mortem analysis
Thomas Eisenbach, Anna Kovner & Michael Junho Lee
Journal of Financial Economics, forthcoming
Abstract:
We model how a cyber attack may be amplified through the U.S. financial system, focusing on the wholesale payments network. We estimate that spillovers of an attack on one of the five most active banks would impair 31% of the network, on average, with some days significantly worse. When other banks respond by liquidity hoarding, forgone payment activity can reach more than 2.5 times daily GDP. A reverse stress test shows attacks on groups of small banks can also impair a significant amount of the network. Interconnectedness through third-party providers and financial market utilities poses additional risks.
How Costly Is Tax Avoidance? Evidence from Structural Estimation
Charles McClure
University of Chicago Working Paper, November 2021
Abstract:
I develop a structural model to quantify the costs of tax avoidance. In the model, the firm trades off tax savings with tax-audit risk, financial-reporting considerations, and operational frictions imposed by tax avoidance, the last of which I label as non-tax costs. The estimated parameters suggest non-tax costs, which are difficult to observe, decrease pretax income by 6.4%, or $58 million per firm-year. The large magnitude of this estimate can explain why firms appear to under-utilize tax-avoidance strategies. Through counterfactual analysis, I estimate the effect of tax-audit risk and financial-reporting considerations to find that financial-reporting considerations have an effect on tax avoidance similar to the penalties imposed by tax authorities. Overall, the estimated parameters help explain the "undersheltering puzzle."
Cost and Efficiency in Government Outsourcing: Evidence from the Dredging Industry
Aaron Barkley
American Economic Journal: Microeconomics, November 2021, Pages 514-547
Abstract:
This paper investigates the how government outsourcing affects efficiency and expenditures by considering how outsourcing decisions are determined along two dimensions: (i) cost differences between private firms and government suppliers of public goods and (ii) dynamics arising from cost complementarities and capacity constraints. I formulate and estimate a dynamic model of government outsourcing using project-level data from the dredging industry. Model estimates indicate substantial cost savings due to outsourcing but also that government presence in the market yields cost reduction. A counterfactual policy featuring direct competition between government and private sector firms finds a total expenditure reduction of 15.7 percent.
The Hidden Costs of Government Shutdowns
Christoph Herpfer, Gonzalo Maturana & Andrew Teodorescu
Emory University Working Paper, November 2021
Abstract:
Government bureaus with higher percentages of furloughed employees during the 2013 government shutdown experienced more employee turnover for two years after the shutdown. This lost workforce was not replenished after employee exits stabilize, at least not within four years after the shutdown. We find that younger employees are more likely to quit, while more experienced employees who receive higher pay are more likely to retire. Affected bureaus react by outsourcing more of their activities. Moreover, their accounting processing and patent creation capabilities decrease, which is consistent with the shutdown eliminating valuable human capital and decreasing government productivity.
Beyond Spatial Proximity: The Impact of Enhanced Spatial Connectedness from New Bridges on Entrepreneurship
Sunasir Dutta, Daniel Erian Armanios & Jaison Desai
Organization Science, forthcoming
Abstract:
Various strands of work have explored how spatial proximity helps (metaphorically) bridge barriers to resource mobilization and foster knowledge transfer. However, much of that work takes spatial connectedness as a given. We argue that spatial connectedness is a distinct construct that affects the extent to which spaces are not just proximate but are actually able to link people, ideas, resources, and knowledge together. We explore one such source of connectedness - physical (not metaphorical) bridges. We find that the opening of newly built bridges enhances startup founding in the local geographic community. Beyond their impact on startup founding, newly built bridges also influence the organizing process for such ventures. This includes a positive impact on the entry of prospective founders into entrepreneurship and an increase in the number of early-stage investors. The subsequently founded ventures are also more likely to engage in recombination and to cross industry boundaries. We explore scope conditions around industry and connective heterogeneity. We also test for robustness to various modeling approaches. The discussion highlights contributions of these findings to the study of entrepreneurship, as well as of organizations and the institutional fields in which they operate.
The Rise of Nonbanks and the Quality of Financial Services
Ahmet Degerli & Jing Wang
Federal Reserve Working Paper, November 2021
Abstract:
We show that as nonbanks' market share increases in a local residential mortgage market, the quality of mortgage services in the market improves. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. The evidence suggests that as nonbanks increase their market share, they develop a specialty in servicing lower-income borrowers, and have more incentives to invest in technological upgrades, leading to improved service quality. This improvement in service quality is more likely to benefit counties with a higher share of minorities.
COVID Racial Disparities in Financial Complaints and the Role of Corporate Social Attitudes
Rachel Hayes et al.
University of Utah Working Paper, December 2021
Abstract:
Using consumer complaints filed with the Consumer Financial Protection Bureau as a measure for the quality of financial products and services, we document significant and robust differential impacts of COVID-19 on high vs. low minority communities. Relative to the pre-COVID period, the racial gap in financial complaints increased by more than 60% during the pandemic. In contrast, we do not find a robust COVID spike related to other heterogeneities in community characteristics. Textual analysis of the complaint narratives reveals that the COVID spike in the racial gap is partly driven by worsening consumer experiences and communication in minority communities - more disputes but less attention from financial institutions during the pandemic. Finally, using triple-differences, we establish the role of corporate social attitudes, reflected in, for example, inclusive promotion practices and diversity in leadership, in mitigating the increase in the racial gap in consumer complaints during COVID.
Conservatism Gets Funded? A Field Experiment on the Role of Negative Information in Novel Project Evaluation
Jacqueline Lane et al.
Management Science, forthcoming
Abstract:
The evaluation and selection of novel projects lies at the heart of scientific and technological innovation, and yet there are persistent concerns about bias, such as conservatism. This paper investigates the role that the format of evaluation, specifically information sharing among expert evaluators, plays in generating conservative decisions. We executed two field experiments in two separate grant-funding opportunities at a leading research university, mobilizing 369 evaluators from seven universities to evaluate 97 projects, resulting in 761 proposal-evaluation pairs and more than $250,000 in awards. We exogenously varied the relative valence (positive and negative) of others' scores and measured how exposures to higher and lower scores affect the focal evaluator's propensity to change their initial score. We found causal evidence of a negativity bias, where evaluators lower their scores by more points after seeing scores more critical than their own rather than raise them after seeing more favorable scores. Qualitative coding of the evaluators' justifications for score changes reveals that exposures to lower scores were associated with greater attention to uncovering weaknesses, whereas exposures to neutral or higher scores were associated with increased emphasis on nonevaluation criteria, such as confidence in one's judgment. The greater power of negative information suggests that information sharing among expert evaluators can lead to more conservative allocation decisions that favor protecting against failure rather than maximizing success.
The Effect of "Federal-Aid Swap" Programs and Davis-Bacon Prevailing Wages on Highway Construction Costs and Contractor Composition: Evidence From Iowa
Frank Manzo
Labor Studies Journal, forthcoming
Abstract:
"Federal-aid swap" programs allow states and local governments to bypass federal Davis-Bacon prevailing wages and Disadvantaged Business Enterprise (DBE) goals by exchanging federal funds that have been allocated to highway projects with state funds. The Iowa Department of Transportation approved a federal-aid swap program in February 2018. Using data on more than 1,200 highway construction projects in Iowa from 2016 to 2020, I find that the cost of projects in the federal-aid swap program are not statistically different from those that were not swapped, after accounting for project size and complexity, project type, and project location. Regression results indicate that Davis-Bacon prevailing wages and DBE goals have no effect on total construction costs. However, the federal-aid swap program is statistically associated with a decrease in the likelihoods that a project is covered by the Davis-Bacon Act by 10 percentage points and DBE goals by 4 percentage points. Because the payment of Davis-Bacon prevailing wages is statistically associated with an 8 percentage-point decrease in the chances that a highway project is awarded to an out-of-state contractor, the federal-aid swap program may have increased the market share of out-of-state contractors at the expense of Iowa-based contractors.
The effects of introducing withholding and third-party reporting on tax collections: Evidence from the U.S. state personal income tax
Sutirtha Bagchi & Libor Dušek
Journal of Public Economics, December 2021
Abstract:
This paper examines the impact of introducing withholding of the personal income tax by state governments in the U.S. We exploit the staggered adoption of withholding by individual states over the period 1948-1987 to construct event study estimates. We obtain a robust finding: Introducing withholding led to an immediate and permanent increase in income tax revenues by about 29 percent, holding tax rates constant. The result is consistent with the crucial role of withholding and third-party reporting in improving tax compliance. We consider several alternative explanations such as changes to the tax base and increases in enforcement activity but these explanations lack support. There is some evidence that non-filing substantially decreased following the introduction of withholding.