Doctor of Philosophy / Department of Economics / Steven P. Cassou / This dissertation consists of three essays relating to asymmetric preferences in optimal monetary policy models. Optimal monetary policy models are theoretical optimal control problems that seek to identify how the monetary authority makes decisions and ultimately formulate decision rules for monetary policy actions. These models are important to policy makers because they help to define expectations of policy responses by the central bank. By identifying how researchers perceive the central bank’s actions over time, the monetary authority can identify how to manage those expectations better and formulate effective policy measures. In chapter 1, using a model of an optimizing monetary authority which has preferences that weigh inflation and unemployment, Ruge-Murcia (2003a; 2004) finds empirical evidence that the monetary authority has asymmetric preferences for unemployment. We extend this model to weigh inflation and output and show that the empirical evidence using these series also supports an asymmetric preference hypothesis, only in our case, preferences are asymmetricforoutput. Wealsofindevidencethatthemonetaryauthoritytargetspotential output rather than some higher output level as would be the case in an extended Barro and Gordon (1983) model. Chapter 2 extends the asymmetric monetary policy problem of Surico (2007) by relaxing the assumption that inflation and interest rate targets are constant using a time varying parameter approach. By estimating a system of equations using iterative maximum likeli- hood, all of the monetary planner’s structural parameters are identified. Evidence indicates that the inflation and interest rate targets are not constant over time for all models esti- mated. Results also indicate that the Federal Reserve does exhibit asymmetric preferences toward inflationary and output gap movements for the full data sample. The results are robust when accounting for changing monetary policy targeting behavior in an extended model. The asymmetry for both inflation and output gaps disappears over the post-Volcker subsample, as in Surico (2007). In chapter 3, Walsh (2003b)’s speed limit objective function is generalized to allow for asymmetry of policy response. A structural model is estimated using unobserved compo- nents to account for core inflation and measure the output gap as in Harvey, Trimbur and Van Dijk (2007) and Harvey (2011). Full sample estimates provide evidence for asymmetry in changes in inflation over time, but reject asymmetry for the traditional speed limit for the output gap. Post-Volcker subsample estimates see asymmetry disappear as in a more traditional asymmetric preferences model like Surico (2007).

Master of Arts / Department of Economics / Peri Da Silva / It is usually preached by economists that trade should be free, but in reality, it is almost always chained. The reason for this discrepancy lies in the fact that trade policies are set in political contexts in which policy makers have different objective function than maximizing economic efficiency. So, endogenous protection literature evolved around the ideas and reasons to explain trade policy as determined under specific political contexts. The early empirical work until late 1980s examined the correlation between different political factors and trade policies. These works were helpful in identifying relative importance of political economy variables, but were criticized to have specifications which were loosely linked with the theories behind them. In recent years with development of theoretical platforms, study of political economy of trade policy has moved to a more structured direction and empirical investigations have been done to link real world data with the model predictions. In this regard, Median Voter model and Grossman-Helpman (GH) model are the main branches of literature. Median Voter model predicts positive tariffs in capital-abundant countries and negative tariffs in labor-abundant ones, but in real world, negative tariffs are rare. Empirical investigation of this model tries to reconcile observed trade policies with median voter model and two of these studies are included in this report. Interest group model is the framework of Grossman-Helpman model in which the effect of organized lobbies in trade policy determination is taken into account. Two empirical studies of this model showed that real world data support this model. By employing modifications in GH model, researchers try to account for factors like lobbying competition and foreign lobbying in explaining data. These results show that foreign lobbying is not necessarily against trade and ignoring lobbying competition may lead to wrong conclusions about welfare mindedness of government.

Master of Arts / Department of Economics / Florence Neymotin / Florence Neymotin / This report provides review of the existing literature on the role model effect in higher education and identifies the methodological and conceptual issues that have complicated the research program before discussing how research on similar areas may provide insight into the relationship between female students and female faculty members. By examining the related literature on the determinants of college major, peer effects, and critical mass theory, the existing studies of role model effect can be interpreted as support for a more specified theory of the role model effect in higher education that highlights the importance of the gender composition of the course or field of study.

Doctor of Philosophy / Department of Economics / Yang-Ming Chang / This dissertation comprises three chapters in international trade and the economics of conflict. These chapters are put together according to two dimensions. From the international relations dimension, Chapter 1 analyzes free trade, which is the most “liberal” form of international relation; Chapter 2 analyzes different types of trade agreements, which is the most common and “moderate” form of international relation; and Chapter 3 analyzes conflict, which is the most violent and “extreme” form of international relation. From the proximity dimension, free trade usually occurs between countries that are far from each other, trade agreements usually signed by countries with in a region, and conflict usually happens between two very close countries. Chapter 1 develops a novel model of international trade in which transportation costs are driven by trade imbalance of an individual country. This task is accomplished by assuming a representative transportation firm in each country that competes with its counterparts from other countries for international operation. The model of trade imbalance driven costs complements results from traditional international trade model in that it sheds light on how trade costs are affected by country size. With multiple countries and a continuum of production firms in each country under monopolistic competition, we derive an index of transportation costs to capture bilateral trade barriers for country pairs. This index is time-variant, which makes it suitable for panel data studies. Based on the index, simulation and simplified three-country free trade model show that countries with a relatively larger size incur a trade deficit while smaller size implies a trade surplus under free trade. A gravity equation is derived and estimated using Poisson Pseudo Maximum Likelihood. Estimation results support the fitness and robustness of the theoretical model of trade using the constructed transportation cost index. Further, statistical test shows that this transportation cost index is a better approximation of bilateral trade cost than distance. A growing number of recent regional trade agreements (RTAs) have introduced provisions concerning cross-border investments. Likewise, a substantial number of RTAs have been preceded by agreements regarding cross-border investments. In Chapter 2, we develop a partial equilibrium three-country model to examine the relationship between RTAs and FDI while also allowing for double taxation. Our analysis shows that the formation of an RTA between two regional countries with wage asymmetry is welfare-improving for the low-wage country and the region, but can be welfare-deteriorating for the high-wage country. We extend our analysis to examine the role of repatriation taxes in the determination of firm location when an RTA is and is not established. Our final result suggests that the signing of an RTA would not induce the relocation of a plant from the high-wage country to the low-wage country unless a reduction of the repatriation tax rate also occurs. In Chapter 3, we attempt to resolve the “inefficiency puzzle of war” by developing a general equilibrium model of bargaining and fighting with endogenous destruction. In the analysis, we consider the scenario that two contending parties engage in bargaining to avoid fighting when there are direct costs (e.g., arms buildups) and indirect costs (e.g., destruction to consumable resources) of conflict. Taking into account different modes of “destruction technology” (in terms of weapons’ destructiveness) without imposing specific functional form restrictions on conflict technology and production technology, we characterize their interactions in determining the Nash equilibrium choice between fighting and bargaining. We find that bargaining is costly as the contending parties always allocate more resources to arming for guarding their settlement through bargaining (but under the shadow of conflict) than in the event of fighting. Contrary to conventional thinking that bargaining is Pareto superior over fighting, we show conditions under which fighting dominates bargaining as the Nash equilibrium choice. The positive analysis may help explain the general causes of fighting, strikes, international conflict, and wars without incomplete information or misperceptions.

Doctor of Philosophy / Department of Economics / Lance Bachmeier / In the first chapter I study the effects of oil price shocks on economic activity at the U.S. state-level, an innovative feature of this dissertation. States which rely more heavily on manufacturing or tourism are more adversely affected by adverse oil price shocks, while states which are major energy producers either benefit or experience insignificant economic changes from historically large oil price increases. Additionally, oil price increases from 1986 to 2011 have not impacted state-level economies to the same degree as increases from 1976 to 1985. This discrepancy can be attributed to a fundamental change in the structure of the U.S. economy, for example, a declining manufacturing sector or an increase in the efficiency with which energy is used in the production process. In the second chapter I explore the effects of alternative measures of energy price shocks on economic activity and examine the relative performance of these alternative measures in forecasting macroeconomic activity. The alternative energy prices I consider are: gasoline, diesel, natural gas, heating oil and electricity. I find that alternative measures of energy price shocks produce different patterns of impulse responses than oil price shocks. The overwhelming evidence indicates that alternative energy price models, excluding a model containing gasoline prices, outperforms the baseline model containing oil prices for many states, particularly at short-to-mid forecast horizons. In the third chapter, which is coauthored with Lance Bachmeier, we determine whether accounting for oil price endogeneity is important when predicting state-level economic activity. We find that accounting for endogeneity matters for in-sample fit for most states. Specifically, in-sample fit would be improved by using a larger model which contains both regular oil price and endogenous oil price movements. However, we conclude that accounting for endogeneity is not important for out-of-sample forecast accuracy, and a simple model containing only the change in the price of oil produces equally accurate forecasts. Accounting for endogeneity is particularly important in an environment in which rising oil prices were caused by a growing global economy, such as in the years 2004-2007.

Master of Arts / Department of Economics / Peri da Silva / Preferential Trade Agreements (PTAs) are known to facilitate liberalization with respect to only a few trading partners and thus they have been a topic of debate for the past two decades especially because their effect on most favored nation (MFN) tariffs is known to be ambiguous. We provide insights for analyzing whether the PTAs indeed hamper or support multilateral liberalization. Using product level official and actual tariffs we provide evidence from the United States (US) import data that the stumbling block effect on the US MFN bound tariffs is present only for goods that receive full preference in books or in actual. However, my dataset does not statistically support the stumbling block hypothesis in the case of Applied tariffs.

Master of Agribusiness / Department of Agricultural Economics / Vincent Amanor-Boadu / Cargill Animal Nutrition is a global manufacturer and distributor of animal nutrition products. They operate in the United States through 6 separately managed regions that control a number of facilities throughout the entire United States. Cargill Animal Nutrition Southeast Region manages a network of eleven plants and two warehouses in the southeast part of the United States. The purpose of this thesis is to explain the current supply chain design including the relationships that exists between facilities, analyze the costs associated with the current design and relationships, and assess the feasibility of alternative designs of supply chain strategies available. A brief description of each facility along with production characteristics specific to each facility is given. Due to certain production characteristics, dependent relationships exist between certain plants. These relationships create restrictions to which our supply chain is subject. Other relationships are not as rigid and thus can be manipulated in pursuit of lowering overall supply chain costs. The model resulting from this thesis will facilitate the assessment of the feasibility of these changes. There are many costs associated with the supply chain; however, costs included in this analysis are limited to the costs that could vary when changing suppliers. The price of the product, transportation costs, and certain warehouse fees deemed relevant to this research are applied to the expected annual sales tons to reach a total cost of supply chain considering the assumptions made. The base scenario was defined according to known facts regarding the current design of our supply chain, which included identification of suppliers, supplier prices, transportation costs, and associated handling/warehouse fees, as well as determining the quantity of product that would need to flow throughout our supply chain. Then the total cost associated with the current supply chain design was assessed according to our analytical model. Once the total cost of the base scenario was determined, comparison to alternative scenarios could take place. Changing the relationships between locations of the supply chain results in alternative scenarios to which the analytical model and decision rule developed can be applied to determine feasibility of the alternative supply chain designs. Operating within the confines of the research, the total cost of the current supply chain design was determined to be $15,697,426. That total cost then serves as a base figure which can be used in comparison with the overall cost of alternative scenario #1. Scenario #1 resulted in a total cost of $15,447,597 – an annual savings of $249,828. Scenarios #2 through #4 were evaluated against the total cost of scenario #1. The total cost of scenario #2 is $15,421,364 which results in annual savings of $26,234. Scenario #3 results in a total supply chain cost of $15,347,888 which equates to annual savings of $9,710 in comparison to scenario #1. The final scenario in this study results in a total cost of $15,443,547. The annual savings generated by scenario #4 in comparison to scenario #1 are $4,050. The results indicate that there are alternative configurations of Cargill Animal Nutrition’s Southeast supply chain that can be developed to increase the competitiveness of operations and improve operational excellence through cost savings. These results are used to inform management in the implementation of the new goals that have been established for the organization. Further utilization of the tool developed will result in increased knowledge of the costs associated with supply chain design. This will allow the company to be able to understand the cost of their supply chain so they can benefit from decreased supply chain costs by reacting to changing market factors.

Doctor of Philosophy / Department of Economics / Lance Bachmeier / This dissertation consists of one essay in financial econometrics and two essays in quantitative industrial organization. The first essay studies the relationship between stock return volatility and current and prior shocks to oil price volatility. We study the behavior of aggregate stock markets as well as individual industry sectors. Our results show that lagged stock return volatility is the main determinant of current stock return volatility in aggregate markets, with oil price volatility providing no additional information that can be used to forecast stock return volatility. For individual industry sectors, we find a robust and stable prediction relationship only for the chemicals industry. Additional estimation exercises confirm the robustness of these results. The second essay uses a Bertrand-Nash price-competition framework to models a vertically integrated provider (VIP) that is a monopoly supplier of an essential input for downstream production. An input price that is “too high” can lead to inefficient foreclosure and one that is “too low” creates incentives for nonprice discrimination. The range of non-exclusionary input prices is circumscribed by the input prices generated on the basis of upper-bound and lower-bound displacement ratios. The admissible range of the ratio of downstream to upstream “price-cost” margins for the VIP is increasing in the degree of product differentiation and reduces to a single ratio in the limit as the products become perfectly homogeneous. The third essay explores the relationship between upstream input prices and downstream market exclusion under a Stackelberg quantity-competition framework. Market exclusion is a concern when input prices are “too high” and “too low” because it can result in inefficient foreclosure and sabotage, respectively. Consistent with the results obtained in the second essay, the safe harbor range of downstream to upstream “price-cost” margin ratios is decreasing in the degree of product homogeneity and approaches a single ratio in the limit as the products become perfectly homogeneous. This single margin ratio preserves equality between the VIP’s wholesale and retail “price-cost” margins. A key finding for competition policy is that the bounds of non-exclusionary input prices are markedly wider under Bertrand-Nash competition than they are under Stackelberg competition. Hence, it is critical that the antitrust and regulatory authorities understand the nature of the industry competition so that rules governing permissible conduct are properly calibrated to yield efficient outcomes.

Doctor of Philosophy / Department of Economics / William F. Blankenau / The first essay considers how the timing of government education spending influences the intergenerational persistence of income. We build a life-cycle model where human capital is accumulated in early and late childhood. Both families and the government can increase the human capital of young agents by investing in education at each stage of childhood. Ability in each dynasty follows a stochastic process. Different abilities and resultant spending histories generate a stochastic steady state distribution of income. We calibrate our model to match aggregate statistics in terms of education expenditures, income persistence and inequality. We show that increasing government spending in early childhood education is effective in lowering intergenerational earnings elasticity. An increase in government funding of early childhood education equivalent to 0.8 percent of GDP reduces income persistence by 8.4 percent. We find that this relatively large effect is due to the weakening relationship between family income and education investment. Since this link is already weak in late childhood, allocating more public resources to late childhood education does not improve the intergenerational mobility of economic status. Furthermore, focusing more on late childhood may raise intergenerational persistence by amplifying the gap in human capital developed in early childhood. The second essay considers parental time investment in early childhood as an education input and explores the impact of early education policies on labor supply and human capital. I develop a five-period overlapping generations model where human capital formation is a multi-stage process. An agent's human capital is accumulated through early and late childhood. Parents make income and time allocation decisions in response to government expenditures and parental leave policies. The model is calibrated to the U.S. economy so that the generated data matches the Gini index and parental participation in education expenditures. The general equilibrium environment shows that subsidizing private education spending and adopting paid parental leave are both effective at increasing human capital. These two policies give parents incentives to increase physical and time investment, respectively. Labor supply decreases due to the introduction of paid parental leave as intended. In addition, low-wage earners are most responsive to parental leave by working less and spending more time with children. The third essay is on the motherhood wage penalty. There is substantial evidence that women with children bear a wage penalty of 5 to 10 percent due to their motherhood status. This wage gap is usually estimated by comparing the wages of working mothers to childless women after controlling for human capital and individual characteristics. This method runs into the problem of selection bias by excluding non-working women. This paper addresses the issue in two ways. First, I develop a simple model of fertility and labor participation decisions to examine the relationships among fertility, employment, and wages. The model implies that mothers face different reservation wages due to variance in preference over child care, while non-mothers face the same reservation wage. Thus, a mother with a relatively high wage may choose not to work because of her strong preference for time with children. In contrast, a childless woman who is not working must face a relatively low wage. For this reason, empirical analysis that focuses only on employed women may result in a biased estimate of the motherhood wage penalty. Second, to test the predictions of the model, I use 2004-2009 data from the 1997 National Longitudinal Survey of Youth (NLSY97) and include non-working women in the two-stage Heckman selection model. The empirical results from OLS and the fixed effects model are consistent with the findings in previous studies. However, the child penalty becomes smaller and insignificant after non-working women are included. It implies that the observed wage gap in the labor market appears to overstate the child wage penalty due to the sample selection bias.

Doctor of Philosophy / Department of Economics / Dong Li / The first essay tests whether the returns to education are different between entrepreneurs and regular employees. If the signaling model of education is correct, entrepreneurs should receive lower returns from education (relative to employees) because they have no need to signal their productivity to an employer. However, this result should only hold if the researcher is able to control for selection into self-employment and the endogeneity of ed- ucation. This is illustrated using a stylized model of signaling. The relationship between self-employment and the returns to education is tested using data from the 1996 Survey of Income and Program Participation. This rich panel dataset makes it possible to control for many business-specific characteristics, like business equity, that have been previously unaccounted for in the literature. Ordinary least squares regressions find the correlation between education and earnings to be weaker for entrepreneurs. To control for selection, I utilize a Heckman selection model using spousal health insurance and housing equity as instruments. It shows that selection biases downward the correlation between education and income for entrepreneurs. Finally, a fixed effects model is employed to control for any time invariant unobserved heterogeneity. This approach indicates that education is as valu- able, if not more valuable, to entrepreneurs as it is to employees. This does not support the signaling hypothesis. The finding is robust to different measures of entrepreneurial earnings. The second essay explores whether unemployed workers make successful transitions into self-employment. It is well established that unemployed workers are more likely to transition into self-employment than individuals coming from paid employment. A growing body of literature suggests that these formerly unemployed entrants tend to exit self-employment earlier than typical entrants. It is tempting to attribute this result to differences in ability between the two groups. However, using an adapted version of Frank (1988)’s Intertemporal Model of Industrial Exit, I show that this is not the case. In this model, entrants to self- employment receive noisy information about their true entrepreneurial ability from their earnings in the market. I show that low ability entrants to entrepreneurship should be no more likely to exit self-employment than high ability entrants to self-employment. This is because although low ability entrants will earn less as entrepreneurs, their outside wage in paid employment will also be proportionately lower. Survival in self-employment, therefore, is a function of how initial expectations match reality. This leads me to suggest that the high exit rates out of self-employment for the formerly unemployed may be because this group systematically overestimates their entrepreneurial ability at entry. This hypothesis is justified by evidence from the psychology literature that low ability individuals tend to overestimate their performance. Duration analysis on data from the 1996 and 2001 panels of the Survey of Income and Program Participation confirms that the formerly unemployed are more likely to exit self-employment. I also find preliminary evidence consistent with the hypothesis that the unemployed overestimate their likelihood of success in self-employment. These findings should give policymakers pause before incentivicing the unemployed to enter self-employment.