Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.
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. Some of our other novel findings are that while geography and fractionalization may limit a county’s ability to curb terrorism, the presence of strong legal institutions deters it.
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. In stage 1 of the game, the donor country allocates resources to terrorism-fighting tied aid, general assistance, and defensive actions at home. The recipient country then decides its proactive campaign against the common terrorist threat in stage 2, while the terrorists direct their attacks against the donor and recipient countries in stage 3. Terrorists’ choices in the final stage provide a solid microfoundation for the terrorists’ likelihood of success function. In stage 2, greater tied aid raises the recipient country’s proactive measures and regime instability, while increased general aid reduces these proactive efforts and regime instability. In stage 1, a donor’s homeland security decisions are interdependent with its aid package to a recipient country, hosting resident transnational terrorists. This interdependency has gone unrecognized to date.
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). Unlike previous studies, we control for toxic pollution from mobile sources and from non-TRI reporting facilities. We find significant adverse effects of TRI exposure on infant mortality. There is evidence that health effects vary across media: air and water having a larger impact than land pollution. And, within air, we find that releases of carcinogens are particularly problematic for infant health outcomes. We estimate that the average county-level decreases in TRI concentrations between 1988 and 2002 saved in excess of 13,800 infant lives.
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. Until 2008:Q3 net credit growth was not dissimilar to the 1980 and 2001 recessions. However, between the third and fourth quarter credit contraction grew larger than credit expansion across all types of loans and for the largest banks. With the inclusion of 2008:Q4 data our series most resemble the intensification of the Savings and Loan crisis. <p><a href=\"/econ/contessi/2009_011_appendix.pdf\" class=\"icon-pdf\">Appendix</a></p>
In his classic work on the economics of fertility, Becker (1960) suggests that children are likely “normal.” We examine this contention. Our first step is documenting an empirical regularity about the cross section of non-Hispanic white married couples in the U.S.: When we restrict comparisons to similarly-educated women living in similarly-expensive locations, completed fertility is positively correlated with the husband’s income. The empirical evidence is consistent with a simple model of household location and fertility choice, with children being “normal.” But this evidence does not settle issues of causality. In an effort to sort out causal effects, we undertake a rather specialized empirical exercise to analyze the localized impact on fertility of the mid 1970s increase in world energy prices—an exogenous shock that substantially increased men’s incomes in the Appalachian coal-mining region. Empirical evidence for that population indicates that fertility is increasing in men’s income.
This paper offers evidence on the design of subprime mortgages as bridge-financing products. We show that the viability of subprime mortgages was uniquely predicated on the appreciation of house prices over short-horizons. High rates of early prepayments on subprime mortgages are suggestive of the use of prepayments as an exit option. This paper argues that high early defaults on post-2004 originations can be explained when one considers high early prepayment rates for pre-2004 originations.
This paper is an exploration of subprime mortgages over the cohorts from 2000 through 2006, especially those prior to 2004. In particular, this study contrasts subprime originations during the “boom years” of 2004-2006 with originations during an “early period” of 2000-2002. We develop a counterfactual technique to determine how originations during the early period would perform in a different environment, namely, the environment faced by originations in 2004, 2005, and 2006. We find that representative originations during the early period of 2000-2002 would not have performed significantly better than representative originations in 2004, 2005, and 2006. This result is robust to counterfactual exercises for originations with different LTVs. We conclude that mortgages of early cohorts were no less vulnerable to the environment faced by cohorts of 2004-2006.
The Interplay Between Preemptive and Defensive Counterterrorism Measures: A Two-Stage Game
A two-stage game depiction of counterterrorism is presented, where the emphasis is on the interaction between the preemptive and defensive measures taken by two targeted countries facing a common threat. The preemptor is likely to be the high-cost defender with the greater foreign interests. A prime-target country may also assume the preemptor role. The analysis identifies key factors – cost comparisons, foreign interests, targeting risks, and domestic terrorism losses – that determine counterterrorism allocations. The study shows that the market failures associated with preemptive and defensive countermeasures may be jointly ameliorated by a disadvantaged defender. Nevertheless, the subgame perfect equilibrium will still be suboptimal owing to a preemption choice that does not fully internalize the externalities.
City Business Cycles and Crime
We explore the influence of city-level business cycle fluctuations on crime in 20 large cities in the United States. Our monthly time-series analysis considers seven crimes over an approximately 20-year period: murder, rape, assault, robbery, burglary, larceny, and motor vehicle theft. Short-run changes in economic conditions, as measured by changes in unemployment and wages, are found to have little effect on city crime across many cities, but property crimes are more likely to be influenced by changes in economic conditions than are more violent crimes. Contrary to the deterrence hypothesis, we find strong evidence that in many cities more arrests follow an increase in crime rather than arrests leading to a decrease in crime. This is true especially for the more visible crimes of robbery and vehicle theft and suggests that city officials desire to remove these crimes from the public’s view.
Institutions and Government Growth: A Comparison of the 1890s and the 1930s
Statistics on the size and growth of the U.S. federal government, along with the rhetoric of President Franklin Roosevelt, seem to indicate that the Great Depression was the event that started the dramatic growth in government spending and intervention in the private sector that has continued to the present day. Through a comparison of the economic conditions of the 1890s and the 1930s, we argue that post-1930 government growth in the United States is not the direct result of the Great Depression, but rather is a result of institutional, legal, and societal changes that began in the late 1800s.
Local Price Variation and Labor Supply Behavior
In standard economic theory, labor supply decisions depend on the complete set of prices: the wage and the prices of relevant consumption goods. Nonetheless, most of theoretical and empirical work ignores prices other than wages when studying labor supply. The question we address in this paper is whether the common practice of ignoring local price variation in labor supply studies is as innocuous as has generally been assumed. We describe a simple model to demonstrate that the effects of wage and non-labor income on labor supply will typically differ by location. We show, in particular, the derivative of the labor supply with respect to non-labor income will be independent of price only when labor supply takes a form based on an implausible separability condition. Empirical evidence demonstrates that the effect of price on labor supply is not a simple “up-or down shift” that would be required to meet the separability condition in our key proposition.
The Dynamic Interaction of Order Flows and the CAD/USD Exchange Rate
We explore the relationship between disaggregated trading flows, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements with a novel data set of unprecedented breadth and length. Foreign financial trading flows appear to demand liquidity, contemporaneously driving the CAD/USD while commercial trading flows seem to be price sensitive, providing liquidity in response to exchange rate movements. Despite strong contemporaneous correlations with trading flows, exchange rate returns are generally not predictable, except for some intriguing success at long horizons. This failure contrasts with much, but not all, previous research on the topic. While two types of CAD trading flows and the CAD/USD appear to be cointegrated, such structure is probably spurious. There appear to be structural breaks in the order-flow-exchange rate VECM systems in 1994-1996 and 1998-1999. <a href="http://research.stlouisfed.org/econ/cneely/Data_Appendix_The_Dynamic_Interaction.pdf">Data Appendix</a>.
Income and Lottery Sales: Transfers Trump Income from Work and Wealth
The effect of income on lottery expenditures has generally been studied using an aggregate measure of income, usually personal income. Reasons exist for thinking that lottery expenditures do not respond equally to all sources of income. This paper examines lottery consumption and income from three sources, namely income from earnings, wealth, and transfer payments. Using county-level data for seven states and controlling for demographic and other characteristics, we find that each source of income has a different effect on lottery ticket expenditures. A noteworthy finding is that purchases are most strongly influenced by changes in transfer payments. Several policy implications follow from our results.
Urban Crime and Labor Mobility
We present a model of crime where two municipalities exist within a metropolitan statistical area (MSA). Consistent with the literature, local law enforcement has a crime reduction effect and a crime diversion effect. The former confers a spillover benefit to the other municipality, while the latter a spillover cost. If the net spillovers are positive (negative), then the respective Nash enforcement levels are too low (high) from the perspective of the MSA. When we allow for Tiebout type mobility, labor will move to the location offering lower disutility of crime (including the tax burden). To attract labor, both jurisdictions would like to reduce crime in their municipality. Interestingly, this could raise or reduce enforcement compared with the immobility case. If it was too high (low) under immobility, it will be raised (reduced) further under mobility. In the symmetric case, neither can gain any labor, but the competition for it pushes the jurisdictions further away from the efficient outcome. Thus, mobility is necessarily welfare reducing. Next, we consider asymmetry in the context of differences in efficiency of enforcement. The low cost municipality has the lower crime damage (inclusive of the tax burden) and attracts labor. Mobility is necessarily welfare reducing for the high cost municipality and for the MSA, but it has an ambiguous effect on the low cost municipality. Finally, we extend the model and allow residents to choose between productive and criminal activities. We conclude that to the extent that enforcement increases the number of criminals (“replacement effect”), jurisdictions have an incentive to reduce their enforcement levels relative to the no-occupational choice case. Additionally, the equilibrium levels of enforcement are more likely to be overprovided in the presence of occupational choice.
Human Capital Externalities and Adult Mortality in the U.S.
Human capital is now widely recognized to confer numerous benefits, including higher incomes, lower incidence of unemployment, and better health, to those who invest in it. Yet, recent evidence suggests that it also produces larger, social (external) benefits, such as greater aggregate income and productivity as well as lower rates of crime and political corruption. This paper considers whether human capital also delivers external benefits via reduced mortality. That is, after conditioning on various individual-specific characteristics including income and education, do we observe lower rates of mortality in economies with higher average levels of education among the total population? Evidence from a sample of more than 200 U.S. metropolitan areas over the decade of the 1990s suggests that there are significant human capital externalities on health. After conditioning on a variety of city-specific characteristics, the findings suggest that a 5 percentage point decrease in the fraction of college graduates in the population corresponds to a 14 to 36 percent increase in the probability of death, on average. Although I am unable to identify the precise mechanism by which this relationship operates, it is certainly consistent with the idea that interactions with highly educated individuals - who tend to exhibit relatively healthy behaviors - encourage others to adopt similar behaviors. Evidence of a significant inverse relationship between aggregate human capital and smoking, conditional on personal characteristics, in a sample of 226 U.S. metropolitan areas is also consistent with this hypothesis.
Lending to Uncreditworthy Borrowers
We study optimal lending behavior under adverse selection in environments with hetero- geneous borrowers specifically, where the borrower’s reservation payoffs (outside options) increase with quality (creditworthiness). Our results show that factors affecting credit sup- ply can also affect lending standards either directly through lending costs or indirectly through borrower reservation payoffs. Lending to uncreditworthy borrowers can be pre- vented by lowering reservation payoffs, by raising lending costs, or both. Lenders seeking to attract creditworthy borrowers with high reservation payoffs would have to lower rates and, consequently, increase collateral requirements on offers that screen out uncreditworthy types. This leads to higher screening costs, thereby increasing the profitability of offers that pool uncreditworthy borrowers a veritable lowering of credit standards. In addition, equilibria in a competition version of the model can also explain the phenomenon of “cream-skimming” by outside (foreign) lenders. Surprisingly, we find that the presence of an informed rival actually aids “cream-skimming” behavior.
This paper documents a little-noticed feature of U.S. labor markets -- very large variation in the labor supply of married women across cities. We focus on cross-city differences in commuting times as a potential explanation for this variation. We start with a model in which commuting times introduce non-convexities into the budget set. Empirical evidence is consistent with the model's predictions: Labor force participation rates of married women are negatively correlated with the metropolitan area commuting time. Also, metropolitan areas with larger increases in average commuting time in 1980-2000 had slower growth in the labor force participation of married women.
Inter-temporal Differences in the Income Elasticity of Demand for Lottery Tickets
We estimate annual income elasticities of demand for lottery tickets using county-level panel data for three states and find that the income elasticity of demand (and thus the tax burden) for lottery tickets has changed over time. This is due to changes in a state’s lottery game portfolio and the growth in consumer income more so than competition from alternative gambling opportunities. Trends in the income elasticity for instant and online lottery games appear to be different. Our results raise doubts about the long-term growth potential of lottery revenue and have policy implications for state governments and those concerned about regressivity.
Earnings Functions When Wages and Prices Vary by Location
Economists generally assume, implicitly, that “the return to schooling" is invariant across local labor markets. We demonstrate that this outcome pertains if and only if preferences are homothetic--a special case that seems unlikely. Our theory predicts that returns to education will instead be relatively low in expensive high-amenity locations. Our analysis of U.S. data provides support for this contention; returns to college are especially low in such cities as San Francisco and Seattle. Our findings call into question standard empirical exercises in labor economics which treat the returns to education as a single parameter.
Government growth and private contributions to charity
We exploit the time-series properties of charitable giving to provide additional insights into the relationship between charitable contributions and government spending. Cointegration tests reveal a significant long-run relationship between several categories of charitable giving and government spending. Granger causality tests provide evidence on the short-run giving and spending relationship. Evidence suggests that charitable contributions to education respond quite differently to state and local government education expenditures versus federal government expenditures. We argue that the government spending and charitable giving relationship depends on the source of government revenue, how this revenue is used, and the rational ignorance of private donors.
Social Learning and Monetary Policy Rules
We analyze the effects of social learning in a widely-studied monetary policy context. Social learning might be viewed as more descriptive of actual learning behavior in complex market economies. Ideas about how best to forecast the economy’s state vector are initially heterogeneous. Agents can copy better forecasting techniques and discard those techniques which are less successful. We seek to understand whether the economy will converge to a rational expectations equilibrium under this more realistic learning dynamic. A key result from the literature in the version of the model we study is that the Taylor Principle governs both the uniqueness and the expectational stability of the rational expectations equilibrium when all agents learn homogeneously using recursive algorithms. We find that the Taylor Principle is not necessary for convergence in a social learning context. We also contribute to the use of genetic algorithm learning in stochastic environments.
Strategic Online-Banking Adoption
In this paper we study the determinants of banks' decision to adopt a transactional web-site for their customers. Using a panel of commercial banks in the United States for the period 2003- 2006, we show that although bank-specific characteristics are important determinants of banks' adoption decisions, competition also plays a prominent role. The extent of competition is related to the geographical overlap of banks in different markets and their relative market share in terms of deposits. In particular, banks adopt earlier in markets where their competitors have already adopted. In order to construct the different local markets, this paper is one of the first that makes use of the geographic market definitions delimited by the Cassidi R Database compiled at the Federal Reserve Bank of St. Louis.
Trends in the Distributions of Income and Human Capital within Metropolitan Areas: 1980-2000
Human capital tends to have significant external effects within local markets, increasing the average income of individuals within the same metropolitan area. However, evidence on both human capital spillovers and peer effects in neighborhoods suggests that these effects may be confined to relatively small areas. Hence, the distribution of income gains from average levels of human capital should depend on how that human capital is distributed throughout a city. This paper explores this issue by documenting the extent to which college graduates are residentially segregated across more than 165000 block groups in 359 U.S. metropolitan areas over the period 1980-2000. Using three different metrics, we find that the segregation of college graduates rose between 1980 and 2000. We also find that cities which experienced larger increases in their levels of segregation also experienced larger increases in income inequality, although our results suggest that inequality and segregation likely influence each other.
Red Ink in the Rearview Mirror: Local Fiscal Conditions and the Issuance of Traffic Tickets
Municipalities have revenue motives for enforcing traffic laws in addition to public safety motives because many traffic offenses are punished via fines and the issuing municipality often retains the revenue. Anecdotal evidence supports this revenue motive. We empirically test this revenue motive using panel data on North Carolina counties. We find that significantly more tickets are issued in the year following a decline in revenue, but the issuance of traffic tickets does not decline in years following revenue increases. Our results suggest that tickets are used as a revenue generation tool rather than solely a means to increase public safety.
This paper describes a non-parametric, unconditional, hyperbolic quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate. We use this estimator to examine changes in the efficiency and productivity of U.S. banks between 1985 and 2004. We find that larger banks experienced larger efficiency and productivity gains than small banks, consistent with the presumption that recent changes in regulation and information technology have favored larger banks.
Neighborhood Income Inequality
This paper offers a descriptive empirical analysis of the geographic pattern of income inequality within a sample of 359 US metropolitan areas between 1980 and 2000. Specifically, we decompose the variance of metropolitan area-level household income into two parts: one associated with the degree of variation among household incomes within neighborhoods - defined by block groups and tracts - and the other associated with the extent of variation among households in different neighborhoods. Consistent with previous work, the results reveal that the vast majority of a city’s overall income inequality - at least three quarters - is driven by within-neighborhood variation rather than between-neighborhood variation, although we find that the latter rose significantly during the 1980s, especially between block groups. We then identify a number of metropolitan area-level characteristics that are associated with both levels of and changes in the degree of each type of residential income inequality.
Existing research has found an inverse relationship between urban density and the degree of income inequality within metropolitan areas, suggesting that, as cities spread out, they become increasingly segregated by income. This paper examines this hypothesis using data covering more than 160000 block groups within 359 US metropolitan areas over the years 1980, 1990, and 2000. The findings indicate that income inequality - defined by the variance of the log household income distribution - does indeed rise significantly as urban density declines. This increase, however, is associated with rising inequality within block groups as cities spread out. The extent of income variation exhibited between different block groups, by contrast, shows virtually no association with population density. There is, accordingly, little evidence that sprawl is systematically associated with greater residential segregation of households by income.
The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing
This paper examines what happens to mortgages in the subprime mortgage market once foreclosure proceeding are initiated. A multinominial logit model that allows for the interdependence of the possible outcomes or risks (cure, partial cure, paid off, and real estate owned) through the correlation of associated unobserved heterogeneities is estimated. The results show that the duration of foreclosures is impacted by many factors including contemporaneous housing market conditions, the prior performance of the loan (prior delinquency), and the state-level legal environment.
War and Pestilence as Labor Market Shocks: Manufacturing Wage Growth 1914-1919
This paper explores the effect of mortalities from the 1918 influenza pandemic and World War I on wage growth in the manufacturing sectors of U.S. states and cities from 1914 to 1919. The hypothesis is that both events caused a decrease in manufacturing labor supply, thereby initially increasing the marginal product of labor and wages. The results reveal that states and cities having had greater influenza mortalities experienced greater wage growth – roughly 2 to 3 percentage points for a 10 percent change in per capita mortalities. World War I combat mortalities also had a positive, but smaller, effect on wage growth.
Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for financial assets with negative expected returns, expected return will be a declining and convex function of skewness. Using a sample of U.S. state lottery games, we find that our theoretical conclusions are supported by the data. Our results have external validity as they also hold for an alternative and more aggregated sample of lottery game data.
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