Highlights 2019

WP 19/06

In “The Extensive Margin of Aggregate Consumption Demand”, Claudio Michelacci, Luigi Paciello and Andrea Pozzi use highly-disaggregated US data to decompose changes in aggregate non-durable consumption expenditure into intensive and extensive margins. The intensive margin reflects the amount spent on products already purchased by households in previous periods. The extensive margin reflects net additions of products to the consumption basket, given by the difference between additions of new products/varieties and removals of previously purchased products/varieties. The authors show that about half of the cyclical fluctuations of aggregate non-durable consumption expenditure is accounted for by net additions, driven mostly by the pro-cyclicality of the rate at which households add new varieties, while removals are comparatively acyclical. This result might be due to changes in firms’ marketing and/or pricing strategies rather than to household demand behavior. To address this issue the authors focus on the effects of the federal government's Economic Stimulus Payment (ESP) to households in 2008. Since the response is gauged by comparing households that receive the payment randomly over time, the estimated responses can be interpreted as characterizing household behavior in partial equilibrium. The authors show that the previous patterns are largely explained by the fact that households respond to income increases by adopting new product varieties in their consumption basket. They show that fluctuations in household adoption are a prominent determinant of the aggregate demand for new products and amplify the long-run welfare effects of aggregate shocks.

WP 19/05

In: “Monetary Policy in a World of Cryptocurrencies”, Pierpaolo Benigno investigates whether the presence of multiple currencies, such as cryptocurrencies, can jeopardize the primary function of Central Banks – controlling prices and inflation – or eventually limit their operational tools –i.e. the interest rate. The short answer is: yes, it can. Starting from the benchmark single-currency model, where the Central Bank controls the rate of inflation by setting the nominal interest rate and the initial price level is instead determined by an appropriate real tax-policy, he extends the framework to allow for multiple currencies. In a two-currency world, the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In a world of multiple competing currencies issued by profit-maximizing agents, the nominal interest rate and inflation are both determined by structural factors, and thus not subject to manipulation, a result hailed by the proponents of currency competition. The paper also proposes some fixes for the classical problem of indeterminacy of exchange rates.

WP 19/04

In: “Tax Professionals: Tax-Evasion Facilitators or Information Hubs?”, Marco Battaglini, Luigi Guiso, Eleonora Patacchini, with Chiara Lacava, investigate whether tax professionals can significantly affect the nature of the relationship between tax authorities and taxpayers. To this aim they merge and analyze tax records of 2.5 million taxpayers in Italy with the respective audit files from the Italian revenue agency (IRA) for seven fiscal years. They show that tax professionals can facilitate tax evasion by helping evasion-prone taxpayers take advantage of the complexity of tax rules. The implication is the emergence of a market for tax professionals where some of them specialize in offering evasion advice to evasion-prone taxpayers. A smart tax authority should then invest resources to learn the accountants’ types, diverting attention from the taxpayers to their intermediaries and auditing with higher probability clients of more evasion-prone tax professionals. The authors find that the IRA policy function is sensitive to tax professionals’ observable characteristics, and significantly (economically and statistically) tilts audits towards tax professionals with a higher share of tax evaders in the past. Despite the IRA’s targeted action, there is strong evidence that evasion-prone taxpayers match with evasion prone-tax accountants, implying that indeed some accountants specialize as tax-evasion facilitators. In addition (or alternatively), tax professionals act as information hubs: taxpayers can learn about the tax authority’s policy because tax professionals can pool the audit experiences of many customers over many years and share this information with each of their clients. From the point of view of the taxpayer, this speeds up learning about the tax authority policy function, providing an additional incentive to rely on tax professionals. From the point of view of the tax authority, auditing one taxpayer can, through the information disseminated by the tax professionals, affect the compliance of the other clients. Indeed, the authors find evidence that reported income not only responds positively to a directly experienced audit but also to the audits of the other customers of one’s own tax professional.

WP 19/03

In “Weight, Reference Points, and the Onset of Eating Disorders”, Eleonora Patacchini, with T. Arduini and D. Iorio, investigates whether the development of eating disorders, in the form of purging, is influenced by peers' body size through interpersonal comparisons. Using detailed information on recent cohorts of U.S. teenagers, they document a sizeable and significant negative effect of high school peers' Body Mass Index on purging behavior during the adolescence for females, but not for males. Interpersonal comparisons among females operate through the formation of a distorted self-perception: teenage girls with relatively thin female peers perceive themselves heavier than they actually are. The girls who are more susceptible to this mechanism are those having peers who are thinner, more popular, more (verbally) able, and with more educated parents.

WP 19/02

In “Coalition Formation in Legislative Bargaining”, Marco Battaglini proposes a new model of multilateral bargaining to study how majorities are formed in legislatures when coalitions are heterogeneous in terms of the surplus they are expected to generate. In the model, a formateur picks a coalition and negotiates for the allocation of the surplus. While she is free to change coalition to seek better deals with other coalitions, she may lose her status if bargaining breaks down, in which case a new formateur is chosen. In this context, a formateur needs to reconcile the need to form the most productive coalition with the desire to maximize the share of output she can capture. The model provides a new perspective on legislative bargaining and helps explaining three well known empirical facts that have been hard to reconcile with non-cooperative models of multilateral bargaining: the absence of significant (or even positive) premia in ministerial allocations for formateurs and their parties; the occurrence of supermajorities; and delays in reaching agreements. While a number of important previous works have attempted to explain these facts individually, this model has the advantage of providing a unified and intuitive explanation for all of them.

WP 19/01

In “A nonlinear dynamic factor model of health and medical treatment” Franco Peracchi, with Claudio Rossetti, investigates the relationship between health and medical treatment and proposes a methodology which overcomes endogeneity problems. The authors set up and estimate a tractable dynamic factor model where observed health outcomes are driven by the individual's latent health stock. The dynamics of latent health reflects both exogenous health depreciation and endogenous health investments. The model allows for the investigation of the effect of medical treatment on current health, as well as on future medical treatment and health outcomes. The model is estimated by maximum simulated likelihood and minimum distance methods using a rich longitudinal data set from Italy. The data include detailed information on medical drug use, hospitalization, and mortality for a representative sample of elderly hypertensive patients. The results show that medical drug use significantly contributes to preventing future worsening of health. These findings suggest that policies aimed at increasing the awareness and the compliance of hypertensive patients help to reduce cardiovascular risks, consequent hospitalization and mortality.

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