Abstract
Public procurement bodies increasingly resort to pay-for-performance contracts to promote efficient spending. We show that firm responses to pay-for-performance can widen the inequality in accessing social services. Focusing on the quality bonus payment initiative in Medicare Advantage, we find that higher quality-rated insurers responded to bonus payments by selecting healthier enrollees with premium differences across counties. Selection is profitable because the quality rating fails to adjust for differences in enrollee health. Selection inflated the bonus payments and shifted the supply of high-rated insurance to the healthiest counties, reducing access to lower-priced, higher-rated insurance in the riskiest counties. Author Archives: The Review of Economics and Statistics Current Issue
Time-Varying Uncertainty of the Federal Reserve’s Output Gap Estimate
Abstract
A factor stochastic volatility model estimates the common component to output gap estimates produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The output gap estimates are uncertain even well after the fact. Nevertheless, the common component is clearly procyclical, and positive innovations to the common component produce movements in macroeconomic variables consistent with an increase in aggregate demand. Heightened macroeconomic uncertainty, as measured by the common component's volatility, leads to persistently negative economic responses. Asymmetric Demand Response When Prices Increase and Decrease: The Case of Child Health Care
Abstract
This study tests whether demand responds symmetrically to price increases and decreases—a seemingly obvious proposition under conventional demand theory that has not been rigorously tested. Exploiting the rapid expansion in Japanese municipal subsidies for child health care in a difference-in-differences framework, we find evidence against conventional demand theory: when coinsurance, our price measure, increases from 0% to 30%, the demand response is more than twice that to a price decrease from 30% to 0%. This result indicates that while economists and policymakers pay little attention, price change direction matters and should be incorporated into welfare analysis. Heterogeneous Innovation over the Business Cycle
Abstract
Schumpeter (1939) claims that recessions are periods of “creative destruction,” concentrating innovation that is useful for the long-term growth of the economy. However previous research finds that standard measures of firms’ innovation, such as R&D expenditures or raw patent counts, concentrate in booms. We argue that these measures do not capture shifts in firms’ innovative search strategies. We contemplate firms’ choice between exploration versus exploitation over the business cycle and find evidence with more nuanced measures of patent characteristics that firms shift toward exploration during contractions and exploitation during expansions, with a stronger effect for firms in more cyclical industries. Health, Longevity, and Welfare Inequality of Older Americans
Abstract
We estimate the distribution of well-being among the older U.S. population using an expected utility framework that incorporates differences in consumption, leisure, health, and mortality. We find large disparities in welfare that have increased over time. Incorporating the cost of living with poor health into elderly welfare substantially increases the overall inequality. Disparity measures based on cross-sectional income or consumption underestimate the growth in aggregate welfare inequality. Moreover, health is a better indicator of an individual's relative welfare position than income or consumption. Strategic Complements or Substitutes? The Case of Adopting Health Information Technology by U.S. Hospitals
Abstract
This paper explores the adoption choice of electronic medical records by U.S. hospitals, which could exhibit strategic complements or substitutes. I find complementarities in adoption through a reduced-form analysis with instruments for unobserved market characteristics. I further develop a dynamic oligopoly model to allow for strategic timing incentives that are missing in the static model. Adopting a dominant local vendor could increase per period profits from adoption by 9.2% over choosing a marginal vendor. A counterfactual analysis suggests that an incentive program rewarding coordination, not just adoption, is more effective in achieving interoperability, especially before the widespread adoption of the technology. Congressional Elections and Union Officer Prosecutions
Abstract
Politicizing the investigation of politically active groups is harmful for both the justice system and democratic accountability. I test whether members of the U.S. Congress affect the investigation and prosecution of politically active labor unions. Union officers are 1.5 percentage points more likely to be prosecuted when their supported candidate barely loses instead of barely wins (compared to the 3% base rate). Anecdotal evidence and a novel decomposition suggest a role for both union-supported winners protecting allies and union-opposed winners pushing for aggressive prosecution of their opponents. I show that prosecutions undermine unions' strength, and I calculate implications for the incumbency advantage. Rules of Thumb and Attention Elasticities: Evidence from Under- and Overreaction to Taxes
Abstract
This paper tests costly attention models of consumers' misreaction to opaque taxes. We report an online shopping experiment that involves shrouded sales taxes that are exogenously varied within consumers over time. Some consumers systematically underreact to sales taxes whereas others systematically overreact, but higher stakes decrease both under- and overreaction. This is consistent with consumers using heterogeneous rules of thumb to compute the opaque tax when the stakes are low, but using costly mental effort at higher stakes. The results allow us to differentiate between various theories of limited attention. We also develop novel econometric techniques for quantifying individual differences. Social Exclusion and Ethnic Segregation in Schools: The Role of Teachers’ Ethnic Prejudice
Abstract
Using data on primary school children and their teachers, we show that teachers who hold prejudicial attitudes towards an ethnic group create socially and spatially segregated classrooms. Leveraging a natural experiment where newly arrived refugee children are randomly assigned to teachers within schools, we find that teachers' ethnic prejudice, measured by an implicit association test, significantly lowers the prevalence of interethnic social links, increases homophilic ties among host children, and puts refugee children at a higher risk of peer violence. Our results highlight the role of teachers in achieving integrated schools in a world of increasing ethnic diversity. Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis
Abstract
We investigate whether the Federal Reserve has responded systematically to house and stock prices and whether this response has changed over time using a Bayesian structural VAR model with time-varying parameters and stochastic volatility. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices, and stock prices. Our results indicate that the systematic component of monetary policy in the United States responded to real stock price growth significantly but episodically, mainly around recessions and periods of financial instability, and took real house price growth into account only in the years preceding the Great Recession. Around half of the estimated response captures the predictor role of asset prices for future inflation and real economic activity, while the remaining component reflects a direct response to stock prices and house prices.