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Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Applied Microeconomics

Credit Scoring and Loan Default

This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.

What do happiness and health satisfaction data tell us about relative risk aversion?

In this paper we provide estimates of the coefficient of relative risk aversion using information on self-reports of subjective personal well-being from multiple datasets.

The Effect of Neighborhood Spillovers on Mortgage Selection

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups.

The Effects of Female Labor Force Participation on Obesity

This paper assesses whether a causal relationship exists between recent increases in female labor force participation and the increased prevalence of obesity amongst women.

Differences in Subprime Loan Pricing Across Races and Neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion

Why Do Education Vouchers Fail at the Ballot Box?

We compare a uniform voucher regime against the status quo mix of public and private education, focusing on the distribution of welfare gains and losses across house- holds by income.

Moral Hazard and Lack of Commitment in Dynamic Economies

We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes.

Dynamic Optimal Insurance and Lack of Commitment

We analyze dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and can self-insure through savings.

Should Easier Access to International Credit Replace Foreign Aid?

We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.

Out-of-School Suspensions and Parental Involvement in Children’s Education

Do parents alter their investment in their child’s human capital in response to changes in school inputs? If they do, then ignoring this effect will bias the estimates of school and parental inputs in educational production functions.

Optimal Auditing and Insurance in a Dynamic Model of Tax Compliance

We study the optimal auditing of a taxpayer’s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state.

Immigration Policy and Counterterrorism

A terrorist group, based in a developing (host) country, draws unskilled and skilled labor from the productive sector to conduct attacks in that nation and abroad.

The Distributional Burden of Instant Lottery Ticket Expenditures: An Analysis by Price Point

This article examines the distributional burden of different price-point instant lottery games. Theoretical reasons exist for expecting higher-priced instant lottery games to be less regressive than lower-priced instant games.

Foreign Direct Investment, Aid, and Terrorism: An Analysis of Developing Countries

Using a dynamic panel data framework, we investigate the relationship between the two major forms of terrorism and foreign direct investment (FDI). We then analyze how these relationships are affected by foreign aid flows.

The Role of Schools in the Production of Achievement

What explains differences in pre-market factors? Three types of inputs are believed to determine the skills agents take to the labor market: ability, family inputs, and school inputs.

International Oligopoly, Barriers to Outsourcing and Domestic Employment

Barriers to outsourcing that are being currently implemented in the US effectively tax its companies who “export” jobs through outsourcing. The objective is to raise domestic employment.

Crime and Arrests: Deterrence or Resource Reallocation?

We use monthly time-series data for 20 large U.S. cities to test the deterrence hypothesis (arrests reduce crimes) and the resource reallocation hypothesis (arrests follow from an increase in crime).

Economic Freedom and Employment Growth in U.S. States

We extend earlier models of economic growth and development by exploring the effect of economic freedom on U.S. state employment growth. We find that states with greater economic freedom – defined as the protection of private property and private markets operating with minimal government interference – experienced greater rates of employment growth.

Where Does Noise Fall on People? Evidence from Atlanta Airport

Spatial heterogeneity of the determinants of airport noise is explored using houses sold near the Atlanta airport. Ordered probit locally weighted regressions (OPLWR) produce results substantively different than those using standard ordered probit.

Is the International Border Effect Larger than the Domestic Border Effect? Evidence from U.S. Trade

Many studies have found that international borders represent large barriers to trade. But how do international borders compare to domestic border barriers? We investigate international and domestic border barriers in a unified framework.

Do Large Banks have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too–big–to–fail.”

Biofuel Subsidies and International Trade

This paper explores optimal biofuel subsidies in a general equilibrium trade model. The focus is on the production of biofuels such as corn-based ethanol, which diverts corn from use as food.

The Effects of Recessions Across Demographic Groups

The burdens of a recession are not spread evenly across demographic groups. The public and media, for example, noticed that, from the start of the current recession in December 2007 through June 2009, men accounted for more than three quarters of net job losses.

The Role of Location in Evaluating Racial Wage Disparity

A standard object of empirical analysis in labor economics is a modified Mincer wage function in which an individual’s log wage is specified to be a function of education, experience, and an indicator variable identifying race.

The Revenue Performance of Casinos after a Smoking Ban: The Case of Illinois

Recent state-wide smoking bans are likely the most significant regulations imposed on the casino gaming industry. We explore the effects that the Illinois state smoking ban has had on Illinois casino revenue and attendance as well as casino tax revenue.

Poverty, Political Freedom, and the Roots of Terrorism in Developing Countries: An Empirical Assessment

This paper finds that political freedom has a significant and non-linear effect on domestic terrorism, but this effect is not significant in the case of transnational terrorism.

Foreign Aid as Counterterrorism Policy

This paper presents a model where foreign aid bolsters a developing country’s proactive counterterrorism efforts against a resident transnational terrorist group.

Toxic Exposure in America: Estimating Fetal and Infant Health Outcomes

We examine the effect of toxic exposure on U.S. infant and fetal mortality rates between 1989 and 2002 from toxic pollution released by facilities reporting to the Toxic Release Inventory (TRI).

U.S. Commercial Bank Lending through 2008:Q4: New Evidence from Gross Credit Flows

What was hiding behind the aggregate commercial bank loans through the end of 2008? We use balance sheet data for every insured U.S. commercial bank from 1999:Q1 to 2008:Q4 to construct credit expansion and credit contraction series and provide new evidence on changes in lending.

Are Children 'Normal'?

In his classic work on the economics of fertility, Becker (1960) suggests that children are likely “normal.” We examine this contention.


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