Macroeconomic Effects from Sovereign Risk vs. Knightian Uncertainty
Ruben Staffa
IWH Discussion Papers,
No. 27,
2023
Abstract
This paper compares macroeconomic effects of Knightian uncertainty and risk using policy shocks for the case of Italy. Drawing on the ambiguity literature, I use changes in the bid-ask spread and mid-price of government bonds as distinct measures for uncertainty and risk. The identification exploits the quasi-pessimistic behavior under ambiguity-aversion and the dealer market structure of government bond markets, where dealers must quote both sides of the market. If uncertainty increases, ambiguity-averse dealers will quasi-pessimistically quote higher ask and lower bid prices – increasing the bid-ask spread. In contrast, a pure change in risk shifts the risk-compensating discount factor which is well approximated by the change in bond mid-prices. I evaluate economic effects of the two measures within an instrumental variable local projection framework. The main findings are threefold. First, the resulting shock time series for uncertainty and risk are uncorrelated with each other at the intraday level, however, upon aggregation to monthly level the measures become correlated. Second, uncertainty is an important driver of economic aggregates. Third, macroeconomic effects of risk and uncertainty are similar, except for the response of prices. While sovereign risk raises inflation, uncertainty suppresses price growth – a result which is in line with increased price rigidity under ambiguity.
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Safety Net or Helping Hand? The Effect of Job Search Assistance and Compensation on Displaced Workers
Daniel Fackler, Jens Stegmaier, Richard Upward
IWH Discussion Papers,
No. 18,
2023
Abstract
We provide the first systematic evidence on the effectiveness of a contested policy in Germany to help displaced workers. So-called “transfer companies” (Transfergesellschaften) employ displaced workers for a fixed period, during which time workers are provided with job-search assistance and are paid a wage which is a substantial fraction of their pre-displacement wage. Using rich and accurate data on workers’ employment patterns before and after displacement, we compare the earnings and employment outcomes of displaced workers who entered transfer companies with those that did not. Workers can choose whether or not to accept a position in a transfer company, and therefore we use the availability of a transfer company at the establishment level as an IV in a model of one-sided compliance. Using an event study, we find that workers who enter a transfer company have significantly worse post-displacement outcomes, but we show that this is likely to be the result of negative selection: workers who lack good outside opportunities are more likely to choose to enter the transfer company. In contrast, ITT and IV estimates indicate that the use of a transfer company has a positive and significant effect on employment rates five years after job loss, but no significant effect on earnings. In addition, the transfer company provides significant additional compensation to displaced workers in the first 12 months after job loss.
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Compensation Regulation in Banking: Executive Director Behavior and Bank Performance after the EU Bonus Cap
Stefano Colonnello, Michael Koetter, Konstantin Wagner
Journal of Accounting and Economics,
No. 1,
2023
Abstract
The regulation that caps executives’ variable compensation, as part of the Capital Requirements Directive IV of 2013, likely affected executive turnover, compensation design, and risk-taking in EU banking. The current study identifies significantly higher average turnover rates but also finds that they are driven by CEOs at poorly performing banks. Banks indemnified their executives by off-setting the bonus cap with higher fixed compensation. Although our evidence is only suggestive, we do not find any reduction in risk-taking at the bank level, one purported aim of the regulation.
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Gender Pay Gap in American CFOs: Theory and Evidence
Bill Francis, Iftekhar Hasan, Gayane Hovakimian, Zenu Sharma
Journal of Corporate Finance,
June
2023
Abstract
Studies document persistent unexplained gender-based wage gap in labor markets. At the executive level, where skill and education are similar, career interruptions and differences in risk preferences primarily explain the extant gender-based pay gap. This study focuses on CFO compensation contracts of Execucomp firms (1992–2020) and finds no gender-based pay gap. This paper offers several explanations for this phenomenon, such as novel evidence on the risk preferences of females with financial expertise and changes in the social and regulatory climate.
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The Impact of Lowering Carbon Emissions on Corporate Labour Investment: A Quasi-Natural Experiment
June Cao, Iftekhar Hasan, Wenwen Li
Energy Economics,
May
2023
Abstract
We examine the impact of low-carbon city (LCC) initiatives on labour investment decisions (quantity, quality, and well-being). Using a time-varying difference-in-differences approach based on staggered implementations of such a pilot program, we report an inefficient outcome - absolute deviation of labour investment from the optimal net hiring – especially for firms in labour-intensive industries and firms with high financial slack or adjustment costs. We, however, observe increased investments in highly skilled personnel and compensated with employee stock ownership, especially by firms under intense pressure to reduce carbon emissions. Such initiatives are also closely associated with the significant enhancement of workplace safety. Overall, LCC helps to upgrade the corporate labour structure by hiring more skilled employees through reduced agency problems and heightened green innovation.
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