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Working Papers

Since working paper no. 17-18 and related commentary on peer-to-peer lending were posted on our website on November 9, the authors have received several questions about the composition of the underlying data set they used in their analysis. In light of the comments received, the authors are currently revising their paper to further clarify the data sample they used in the study. Their revised paper will be posted as soon as it is completed.

Working Papers

  • WP 17-21 | Costly Information Intermediation as a Natural Monopoly

    Daniel Monte Roberto Pinheiro


    In this paper, we show that information trade has similar characteristics to a natural monopoly, where competition may be detrimental to efficiency due either to the duplication of direct costs or the slowing down of information dissemination. We present a model with two large populations in which consumers are randomly matched to providers on a period-by-period basis. Despite a moral hazard problem, cooperation can be sustained through an institution that gives incentives to information exchange. We consider different information pricing mechanisms (membership vs. buy and sell) and different competitive environments. In equilibrium, both pricing and competitive schemes affect the direct and indirect costs of information transmission, represented by directed fees paid by consumers and the expected loss due to imperfect information, respectively.   Read More

  • WP 17-20 | Convergence of Cultural Traits with Time-Varying Self-Confidence in the Panebianco (2014) Model--A Corrigendum

    Fabrizio Panebianco Anja Prummer Jan-Peter Siedlarek


    We highlight that convergence in repeated averaging models commonly used to study cultural traits or opinion dynamics is not equivalent to convergence in Markov chain settings if transition matrices are time-varying. We then establish a new proof for the convergence of cultural traits in the model of Panebianco (2014) correcting the existing proof. The new proof provides novel insights on the long-run outcomes for inessential individuals. We close with a discussion of conditions for convergence in repeated averaging models with time-varying transition matrices.   Read More

  • WP 17-19 | Comparison of Small Bank Failures and FDIC Losses in the 1986–92 and 2007–13 Banking Crises

    Edward S. Prescott Eliana Balla Laurel Mazur John Walter


    Failure rates of small commercial banks during the banking crisis of the late 1980s were about 7.6%, which is significantly higher than the 5.7% failure rate during the recent crisis. We compare failure rates in the two periods using a statistical model that allows us to decompose the effect of changes in bank characteristics and economic shocks on failure rates. We find that the severe economic shocks of the recent crisis had a larger impact on high bank failure rates than bank characteristics.   Read More

  • WP 17-17 | Testing for Differences in Path Forecast Accuracy: Forecast-Error Dynamics Matter

    Andrew B. Martinez


    Although the trajectory and path of future outcomes plays an important role in policy decisions, analyses of forecast accuracy typically focus on individual point forecasts. However, it is important to examine the path forecasts errors since they include the forecast dynamics. We use the link between path forecast evaluation methods and the joint predictive density to propose a test for differences in system path forecast accuracy. We also demonstrate how our test relates to and extends existing joint testing approaches. Simulations highlight both the advantages and disadvantages of path forecast accuracy tests in detecting a broad range of differences in forecast errors. We compare the Federal Reserve's Greenbook point and path forecasts against four DSGE model forecasts. The results show that differences in forecast-error dynamics can play an important role in the assessment of forecast accuracy.   Read More

  • 16-25r | The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets

    Kristle Cortés Andrew Glover Murat Tasci


    We document that county-level job vacancies decline between 9.5 and 12.4 percent after states enact laws that restrict employers' access to the credit reports of job applicants. The evidence suggests that, counter to their intent, employer credit-check bans disrupt labor and credit markets, especially for workers who are subprime borrowers.   Read More

  • WP 14-42R | The Politics of Flat Taxes

    Daniel R. Carroll Jim Dolmas Eric Young

    Original Paper: WP 14-42


    We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors—the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting—in determining the equilibrium mix of taxes.   Read More

  • WP 14-32R2 | Neoclassical Inequality

    Daniel R. Carroll Eric Young

    Original Paper: WP 14-32 | Revisions: WP 14-32R


    In a model with a worker-capitalist dichotomy, we show that the relationship between inequality (measured as a ratio of incomes for the two types) and growth is complicated; zero growth generally lowers inequality, except under extreme parameterizations. In particular, the elasticity of substitution between capital and labor in production needs to be considerably greater than 1 in order for income inequality be higher with zero growth. If this condition is not met, factor prices adjust strongly causing the fall in the return to capital (the rise in wages) to reduce income inequality. Our results extend to models with endogenous growth.   Read More

  • WP 17-16 | Politicizing Consumer Credit

    Pat Akey Rawley Z. Heimer Stefan Lewellen


    Using proprietary credit bureau data, we find that consumers’ access to credit decreases by 4.5 percent–8 percent when the borrower’s home-state U.S. senator becomes the chair of a powerful Senate committee. The reduction in credit access mostly affects historically credit-constrained consumers (low income and nonwhite and borrowers with poor credit scores), and is stronger in areas with less politically engaged constituents and more politically connected lenders. Additional evidence supports a “political protection” hypothesis—banks that are connected to powerful politicians consider fair-lending regulatory guidelines to be less binding. The results highlight the distinction between political power and legislative outcomes, and contrast recent findings that governments expand credit access to firms and consumers.   Read More

  • WP 17-15 | Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors

    Todd E. Clark Michael McCracken Elmar Mertens


    We develop uncertainty measures for point forecasts from surveys such as the Survey of Professional Forecasters, Blue Chip, or the Federal Open Market Committee’s Summary of Economic Projections. At a given point of time, these surveys provide forecasts for macroeconomic variables at multiple horizons. To track time-varying uncertainty in the associated forecast errors, we derive a multiple-horizon specification of stochastic volatility. Compared to constant-variance approaches, our stochastic-volatility model improves the accuracy of uncertainty measures for survey forecasts.   Read More

  • WP 16-05R | Choosing a Control Group for Displaced Workers

    Pawel Krolikowski

    Original Paper: WP 16-05


    The vast majority of studies on the earnings of displaced workers use a control group of never-displaced workers to examine the effects of initial displacements. This approach attributes earnings declines due to all future job instability to the initial displacement event, overstating the losses relative to the average treatment effect. This paper’s approach isolates the impact of an average displacement without conditioning on future displacement status in the control group. In comparisons of the standard and alternative approaches using PSID data, the estimated long-run earnings losses fall dramatically from 25 percent to as low as 5 percent.   Read More