European Economic Review

Abstract of associated article: This is the first study investigating the development of the capability to reason backwards in children, adolescents, and young adults aged 6 to 23 under controlled laboratory conditions. The experimental design employs a modified version of the race game. As in the original game, subjects need to apply backward analysis in order to solve the games. We find that subjects’ capability to reason backwards improves with age, but that this process systematically differs across genders. Our repetition of the games indicates that differences exist also in learning between age groups and across genders.

Abstract of associated article: Auctions often involve goods exhibiting a common-knowledge ex-post risk. In such auctions, precautionary bidding predicts that under expected utility, DARA bidders reduce their bids by more than the appropriate risk premium. Because the degree of riskiness of an auctioned good and bidders׳ levels of risk aversion are difficult to observe in field settings, we conduct experimental auctions that allow us to identify the precautionary premium directly. We find strong evidence for precautionary bidding. The effect is robust to changes in experimental design features. Our experiment provides the first empirical demonstration of precautionary motives in a strategic setting.

Abstract of associated article: We use a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role for the labor wedge and unemployment. We find that there is an asymmetric effect of labor market frictions on the labor wedge and unemployment. While the wedge is to a large extent explained by changes in matching efficiency, unemployment is accounted for by the combination of frictions to matching efficiency, job destruction and bargaining. If search and matching frictions give rise to the labor wedge, then it is relevant for explaining unemployment mainly through changes in matching efficiency.

Abstract of associated article: Numerous studies have examined factors influencing the likelihood of cooperative outcomes in nonzero-sum games, but there has been little study of the interaction between two of the most important: group size and pre-play cheap talk. We report results from an experiment in which groups of size between 2 and 15 play a one-shot multi-player threshold public-good game. In our random leader treatment, all group members select a suggestion (e.g., “Everyone should choose X”), with one randomly chosen to be broadcast to the group. In a choice only treatment, subjects choose suggestions but none is sent, and in a baseline treatment, there are no suggestions at all. We find a negative interaction between group size and this kind of communication: the beneficial effect of both suggestions overall and cooperative suggestions on cooperation, cooperative outcomes, and payoffs decreases sharply as the group size increases. We find a similar negative interaction in a follow-up treatment in which all group members’ suggestions are broadcast to the group. Our results suggest that care should be taken in generalising conclusions from small-group experiments to large groups.

Abstract of associated article: In this paper, we shed light on the relative contribution of the separation and job finding rates to French unemployment at business cycle frequencies by using administrative data on registered unemployment and labor force surveys. We first investigate the fluctuations in steady state unemployment, and then in current unemployment in order to take into account the unemployment deviations from equilibrium. Both data sets lead to quite similar results. Both rates contributed to unemployment fluctuations during the nineties (50:50 split), while in the last decade the job finding rate was more significant and explained around 65% of the French unemployment fluctuations. In particular, the last business cycle episode, including the last recession, exacerbated the role of the job finding rate. We then show that the predominant role of the job finding rate in the last decade holds when the economy is hit by aggregate business cycle shocks, moving unemployment and vacancies along the Beveridge curve.

Abstract of associated article: This paper investigates theoretically and empirically the heterogeneous response of exporters to real exchange rate fluctuations due to the quality of imported inputs and exported output. We develop a model where the production of high-quality products requires high-quality inputs sold in monopolistically competitive foreign markets. The model predicts that exporters using imported inputs have low exchange rate pass-through, but this effect is weaker for firms shipping high-quality goods. This is due to the heterogeneous price adjustments of foreign suppliers selling inputs of different quality. We test the predictions of the model using Italian firm-level trade data for the period 2000–2006. The empirical analysis shows that the imports of intermediates have a significantly weaker effect in reducing the exchange rate pass-through into the export price of high-quality varieties. By showing that the import price of high-quality inputs is less sensitive to exchange rate variations, we provide evidence supporting the theoretical hypothesis that the pricing power of input suppliers weakens the import channel.

Abstract of associated article: Audiovisual services such as music and movies in digital formats have gained substantial importance over the last decade. This paper analyses audiovisual services in a gravity model framework. In particular, we explore the role of virtual proximity – a new proxy for cultural proximity based on bilateral hyperlinks and bilateral website visits between countries – and find that ‘virtually-proximate’ countries trade significantly larger amounts of audiovisual services. Our results show that virtual proximity also has a larger impact on trade in audiovisual services than on total services trade. Moreover, in line with Hanson and Xiang (2011), our analysis indicates that in the audiovisual services sector, global fixed export costs dominate bilateral fixed export costs for most countries in our sample.

The Effect of Language on Economic Behavior: Examining the Causal Link between Future Tense and Time Preference in the Lab

Abstract of associated article: We propose and estimate a dynamic stochastic general equilibrium model featuring search and matching frictions, deep habits and a CES production function. The model successfully replicates the cyclical properties of labour market variables in the US economy for three main reasons. First, two of the endogenous mechanisms of the model – factor complementarity and unemployment benefits – play a key role for explaining the amplification in unemployment and vacancies. Second, deep habits have a smaller but significant role as an endogenous mechanism. Third, capital-augmenting productivity, investment-specific and matching efficiency innovations explain large part of the variation in labour market variables.

Data, Dynare and MatLab codes to replicate the main results of the paper.