UMBC Department of Economics

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2009 Working Papers

Working Paper 09-101: "The Benefit-Cost Analysis of Security Focused Regulations" by Scott Farrow and Stuart Shapiro.

Abstract: Security focused regulations have been largely exempt from the benefit-cost type of analysis required for major Federal regulations and done routinely in areas such as transportation, environment and safety. among the reasons offered for exemption are the analytical difficulties of security issues involving complex or poorly understood probabilities and consequences. This paper investigates the magnitude of security focused regulations, a framework for developing an expected costs analysis of regulations, and the current "break-even" analysis used by the Department of Homeland Security. Key assumptions implicit in the current analysis are identified and suggestions are made for the difficult evolution of security regulations toward a more explicit benefit-cost analysis.

Working Paper 09-102: "Improving the Regulatory Analysis of the Cooling Water Intake Structure Rule: What Does an Economist Want?" by Scott Farrow.

Abstract: As part of an edited volume devoted to the usefulness of benefit-cost analysis to inform regulatory review, this chapter presents a case study of the regulation of cooling water intake structures (CWIS) at existing power plants. The chapter first focuses on the consistency of the CWIS benefit-cost analysis with quality criteria to which the agency might have been expected to adhere. Second, criteria and outcomes with respect to decision rules for the selected alternatives are investigated. Finally, the challenge faced by agency analysis is described due to the difficulty in linking ecological and economic impacts. Suggestions for improvement are noted. As of the date of writing, the regulation is under review by the Supreme Court.

Working Paper 09-103: "Random Error and Simulation Models With an Unobserved Dependent Variable as applied to the Benefits and Costs of the Clean Air Act" by Scott Farrow.
Abstract: Most empirical simulation models used in benefit-cost or risk analysis investigate uncertainty based on variability in parameters and conditioning factors. A pure random error term is frequently omitted. Ex-ante benefit-cost analyses create a particular problem because there are not historically observed values of the dependent variable, such as net present value. An estimator for the error variance is developed based on analysis of variance measures and R-squared. When applied to a model of the net benefits of the Clean Air Act, the probability that the net present value is negative increases from .2 to 4.5 percent.

Working Paper 09-104: "Family Separation and Reunification as a Factor in the Educational Success of Immigrant Children" by T. H. Gindling and Sara Z. Poggio.

Abstract: We find that family separation during migration has a negative impact on the educational success of immigrant children in U.S. schools. Children separated from parents during migration are more likely to be behind
others their age in school, are more likely to repeat a grade, and are more likely to drop out of high school.
The negative impact of separation during migration on educational success is largest for Latin American immigrants, for children separated from their mothers (as opposed to fathers), for those whose parents have lived in the United States illegally, and for those who were separated from their parents at older ages and reunited with parents as teenagers.
Working Paper 09-105: "Is Tax sharing Optimal? An Analysis in a Principal-Agent Framework" by Barnali Gupta and Christelle Viauroux.

Abstract: We study the effects of a statutory wage tax sharing rule in a principal - agent framework with moral hazard (à la Holmstrom, 1979) using the approach of Bose, Pal, Sappington (2007) to model the stochastic relationship between the agent’s unobserved effort and his observed performance. The analysis indicates that tax sharing with positive legislated contributions from both the employer and employee does not maximize any of the outcomes - employee effort, wages, profits or welfare. Moreover, a rule which specifies a corner solution, with 100% of the tax statutorily levied on the employer will maximize effort, expected profit and expected welfare while 100% of the tax statutorily levied on the employee will maximize expected wages.
Working Paper 09-106: "Urban Growth Externalities and Neighborhood Incentives: Another Cause of Urban Sprawl?" by Matthias Cinyabuguma and Virginia McConnell.

Abstract: This paper suggests a cause of low density in urban development or urban sprawl that has not been given much attention in the literature. There have been a number of arguments put forward for market failures that may account for urban sprawl, including incomplete pricing of infrastructure, environmental externalities, and unpriced congestion. The problem analyzed here is that urban growth creates benefits for an entire urban area, but the costs of growth are borne by individual neighborhoods. An externality problem arises because existing residents perceive the costs associated with the new residents locating in their neighborhoods, but not the full benefits of new entrants which accrue to the city as a whole. The result is that existing residents have an incentive to block new residents to their neighborhoods, resulting in cities that are less dense than is optimal, or too sprawling. The paper models several different types of urban growth, and examines the optimal and local choice outcomes under each type. In the first model, population growth is endogenous and the physical limits of the city are fixed. The second model examines the case in which population growth in the region is given, but the city boundary is allowed to vary. We show that in both cases the city will tend to be larger and less dense than is optimal. In each, we examine the sensitivity of the model to the number of neighborhoods and to the size of infrastructure and transportation costs. Finally, we examine optimal subsidies and see how they compare to current policies such as impact fees on new development.
Working Paper 09-107: "Optimal pricing of endogenous congestion: a disaggregated approach" by Christelle Viauroux.

Abstract: We design and estimate a game theoretic congestion pricing mechanism in which the regulator aims at reducing traffic congestion by discriminating travelers according to their willingness to travel on the network. He knows that travelers learn about their environment, that their preferences are affected by the reputation of each available mode of transportation and that congestion can be seen as a Bayesian game in which travelers impose externalities on each other. We derive individual optimal fares depending on each traveler's valuation of transportation. Welfare simulation results based on a French household survey show that the travelers' perception of the mode of transportation and income sensitivity differences are important determinants of welfare improvement.
Working Paper 09-108: "Schooling, Fertility, and Married Female Labor Supply: What Role for Health?" by Matthias Cinyabuguma, Bill Lord and Christelle Viauroux.

Abstract: Between the latter nineteenth century and the 1930s there was a dramatic revolution in American families. Family size continued its long-term decline, the schooling of older children expanded and the proportion of married females' adulthood devoted to market-oriented activities increased. Over this same period there were significant reductions in mortality, especially among the young, and impressive reductions in morbidity. This paper considers all these trends jointly, modeling the changes in fertility, child schooling and lifetime married female labor supply as a consequence of exogenous changes in health. These interactions are then quantified using calibration techniques. The simulations suggest that reductions in child mortality alone cannot explain the transformation of the American family. Indeed, in our preferred calibration, reductions in child mortality lead to a modest decline in human capital and increase in fertility, with little effect on married female labor force involvement. In sharp contrast, reductions in morbidity are found to lower fertility and increase education. The time savings from lower fertility more than offset the increased time mothers invest in their childrens' quality, freeing some time for market work. Nevertheless, to quantitatively account for the increase in mother's time spent at work it proves necessary to generate further reductions in mother's household production time. In our framework this is driven by a narrowing of the gender wage gap. More generally, viewing the implications of health improvements deepens our understanding of the American family transformation, complementing explanations based on narrowing of the gender wage gap, skill biased technical change and changes in household technology.
Working Paper 09-109: "Optimal Energy Efficiency Policies and Regulatory Demand-Side Management Tests: How Well Do They Match?" by Timothy J. Brennan.

Abstract: Under conventional models, subsidizing energy efficiency requires electricity to be priced below marginal cost. Its benefits increase when electricity prices increase to finance the subsidy. With high prices, subsidies are counterproductive unless consumers fail to make efficiency investments when private benefits exceed costs. If the gain from adopting efficiency is only reduced electricity spending, capping revenues from energy sales may induce a utility to substitute efficiency for generation when the former is less costly. This goes beyond standard “decoupling” of distribution revenues from sales, requiring complex energy price regulation. The models’ results are used to evaluate tests in the 2002 California Standard Practice Manual for assessing demand-side management programs. Its “Ratepayer Impact Measure” test best conforms to the condition that electricity price is too low. Its “Total Resource Cost” and “Societal Cost” tests resemble the condition for expanded decoupling. No test incorporates optimality conditions apart from consumer choice failure.
Working Paper 09-110: "Energy Efficiency: Efficiency or Monopsony?" by Timothy J. Brennan.

Abstract: The cliché in the electricity sector, the "cheapest power plant is the one we don’t build," seems to neglect the benefits of the energy that plant would generate. Those overall benefits could be countered by benefits to consumers if "not building that plant" was the result of monopsony. A regulator acting as a monopsonist may need to avoid rationing demand at monopsony prices. Subsidizing energy efficiency to reduce electricity demand at the margin can solve that problem, if energy efficiency and electricity use are substitutes. We may not observe these effects if the regulator can set price as well as quantity, lacks buyer-side market power, or is legally precluded from denying generators a reasonable return on capital. Nevertheless, the possibility of monopsony remains significant in light of the debate as to whether antitrust enforcement should maximize consumer welfare or total welfare.
Working Paper 09-111: "The Challenges of Climate for Energy Markets" by Timothy J. Brennan.

Abstract: Among the many complex issues of technology, governance, and market design affecting the electricity sector, climate policy has become dominant. From the perspective of a nonspecialist looking at this changing dominance, a quiz illuminates some of the peculiar uses of language one can find in climate change and energy efficiency policy. Six economic challenges are then examined: cap-and-trade vs. taxes, non-price regulations, energy efficiency policies, mitigation vs. adaptation, trade effects, and transmission planning. Three additional challenges affect not just the means to the climate policy end but also the end itself: the “fat tails” problem, discount rates, and whether environmental protection should be evaluated by aggregating willingness to pay across persons. Planners in the public and private sectors need to be aware of not only the economic policy challenges but also arguments that may influence the intensity of the climate policies with which they have to cope.
Working Paper 09-112: "More Than a Wing and a Prayer: Government Indemnification of the Commercial Space Launch Industry" by Timothy J. Brennan, Carolyn Kousky and Molly K. Macauley.

Abstract: Using rockets to launch communications satellites and other spacecraft poses risks to the uninvolved public, including persons and property under the flight path of the launch vehicle. The federal government plays a pivotal technical role during the actual launch by carrying out certain risk-related procedures, thus causing third-party risk to be jointly produced by the company and the government. In addition, under the Commercial Space Launch Act, the government partially indemnifies commercial launch companies for third-party damages. We compare the indemnification policy to optimal liability rules under public-private co-production of risk. Under modest assumptions, shared liability created by the indemnification rules decreases the incentive of both parties to take care relative to the optimum. If care were observable, it would be preferable for the government to fully indemnify companies that take due care. The role of the government as an agent for third parties may qualify these findings.
Working Paper 09-113: "Geographic Consistency of Subprime Loan Features and Foreclosures" by Morgan J. Rose.

Abstract: The recent rise in subprime foreclosures has prompted restrictions at the federal, state, and municipal levels against a range of loan features loosely termed “predatory.” The effectiveness of federal regulation depends on the consistency of those features’ impacts on foreclosures in markets nationwide. Using data on subprime refinance and purchase mortgages in ten metropolitan areas, I examine the impact of long prepayment penalty periods, balloon payments, and reduced documentation on the probability of foreclosure. Results indicate that reduced documentation is consistently associated with higher probabilities of foreclosure, while the impacts of the other features are more sporadic.
Working Paper 09-114: "The Exchange Rate and Macroeconomic Determinants: Time-Varying Transitional Dynamics" by Chunming Yuan.

Abstract: In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market’s belief in the probability of the process staying in certain regime next period. This paper further takes into account the ARCH effects of the volatility of the exchange rate. Empirical results generally confirm that fundamentals can affect the evolution of the dynamics of the exchange rate in a nonlinear way through the transition probabilities. In addition, I find that the volatility of the exchange rate is associated with significant ARCH effects which are subject to regime change.
Working Paper 09-115: "Forecasting Exchange Rates: The Multi-State Markov-Switching Model with Smoothing" by Chunming Yuan.

Abstract: This paper presents an exchange rate forecasting model which combines the multi-state Markov-switching model with smoothing techniques. The model outperforms a random walk at short horizons and its superior forecastability appears to be robust over different sample spans. Our finding hinges on the fact that exchange rates tend to follow highly persistent trends and accordingly, the key to beating the random walk is to identify these trends. An attempt to link the trends in exchange rates to the underlying macroeconomic determinants further reveals that fundamentals-based linear models generally fail to capture the persistence in exchange rates and thus are incapable of outforecasting the random walk.
Working Paper 09-116: "Speculation and Hedging in the Currency Futures Markets: Are They Informative to the Spot Exchange Rates" by Aaron Tornell and Chunming Yuan.

Abstract: This paper presents an empirical analysis investigating the relationship between the futures trading activities of speculators and hedgers and the potential movements of major spot exchange rates. A set of trader position measures are employed as regression predictors, including the level and change of net positions, an investor sentiment index, extremely bullish/bearish sentiments, and the peak/trough indicators. We find that the peaks and troughs of net positions are generally useful predictors to the evolution of spot exchange rates but other trader position measures are less correlated with future market movements. In addition, speculative position measures usually forecast price-continuations in spot rates while hedging position measures forecast price-reversals in these markets.

2004 Working Papers (incomplete)

Working Paper 04-101: "Baseball Strikes and the Demand for Attendance" by Dennis Coates and Thane Harrison.

Abstract: Professional baseball has experienced numerous work-stoppages over the last 30 years, including three which resulted in the cancellation of games. Existing estimates of the demand for attendance at Major League Baseball games has found that only those events which caused the loss of games influenced attendance. This paper revisits the issue of whether strikes affect attendance and finds that even those lockouts and strikes that do not cause games to be canceled are associated with significantly lower attendance. Moreover, despite dramatic differences in the severity of the three strikes that canceled games, one cannot reject the hypothesis that the effects are the same. Finally, the evidence here suggests that attendance is adversely affected by events leading up to negotiation of a new Basic Agreement between the players and the owners.
Working Paper 04-102: "Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica" by T. H. Gindling and Katherine Terrell
Abstract: The classic dual economy models of developing countries hold minimum wages (among other institutions) accountable for persistent dualism. They note that applying or enforcing minimum wage laws in only one sector of the economy will create wage differentials which will not be eroded with labor mobility to the high wage sector. In this paper we use 12 years of micro data on thousands workers living in Costa Rica to test whether legal minimum wages have a differential impact on the wages of workers in the formal sector vs. informal sector, defined in various ways in accordance with the dual development models. The evidence from Costa Rica is contrary to the assumptions of these models. We find that increases in minimum wages not only raise the wages of workers in the urban formal sector (large urban enterprises) who are covered by minimum wage law, but they also increase the wages of all other workers covered by minimum wage legislation in what are traditionally regarded as informal sectors and where the legislation is often considered not to be enforced. Specifically, we provide evidence that minimum wages increase the wages of workers in small urban enterprises, large rural enterprises and small rural enterprises. Further, our results suggest that higher legal minimum wages raise the average wage of workers in these "informal" sectors more than in the urban formal sector. We concluded that in Costa Rica minimum wages are being enforced in the rural and small scale sectors and may actually work to reduce average wage differentials between these sectors and the urban formal sector. On the other hand, minimum wages have no significant impact on the wages of workers in another sector that is regarded as informal but which is not covered by minimum wage legislation: the self-employed workers (both urban and rural). Thus, one could argue that minimum wages may contribute to dualism between the formal and informal, defined as self-employed vs. salaried workers. However, we find no evidence of the bleaker scenario, that self-employed earnings are being lowered by minimum wages.

2003 Working Papers (incomplete)

Working Paper 03-101: "Novelty Effects of New Facilities on Attendance at Professional Sporting Events" by Dennis Coates and Brad R. Humphreys.

Abstract: We investigate the possibility that new facilities affect attendance - the "novelty effect" - in professional baseball, basketball, and football from 1969-2001 by estimating the parameters of a reduced form attendance model. Our results indicate a strong, persistent novelty effect in baseball and basketball and little or no novelty effect in football. Our estimates of size and duration of the novelty effect imply that, in a new facility, at a minimum, a baseball team would sell an additional 2,561,702 tickets over the first eight seasons, a basketball team 446,936 over the first nine seasons, and a football team 163,436 over the first five seasons. This increase in attendance also suggests a corresponding increase in revenues that could be tapped to help defray the large public subsidies that state and local governments frequently provide to new stadium and arena construction projects.
Working Paper 03-102: "The Relationship Between Big-Time College Football and State Appropriations to Higher Education" by Brad R. Humphreys.

Abstract: I investigate the relationship between big-time college football programs and state appropriations to public institutions of higher education. Estimation of a linear reduced form model of the determination of state appropriations to higher education, using a panel of financial, athletic, and state-specific economic data from 570 public institutions of higher education at the Baccalaureate level or higher from 1976-1996 shows that schools with Division I-A football programs receive about 6% more in state appropriations than schools that do not field a Division I-A football team. Institutions with successful football teams receive 3% to 8% increases in state appropriations the following year. Defeating an in-state rival in a prominent football game is also associated with an increased level of appropriation in the following year. These results support the predictions of the model of competition for political influence among pressure groups developed by Becker (1983) and suggest that the total economic benefit associated with big-time athletic programs may be larger than previously thought.
Working Paper 03-103: "Professional Sports Facilities, Franchises and Urban Economic Development" by Dennis Coates and Brad R. Humphreys.

Abstract: Local political and community leaders and the owners of professional sports teams frequently claim that professional sports facilities and franchises are important engines of economic development in urban areas. These structures and teams allegedly contribute millions of dollars of net new spending annually and create hundreds of new jobs, and provide justification for hundreds of millions of dollars of public subsidies for the construction of many new professional sports facilities in the United Sates over the past decade. Despite these claims, economists have found no evidence of positive economic impact of professional sports teams and facilities on urban economies. We critically review the debate on the economic effects of professional sports and their role as an engine of urban economic redevelopment, with an emphasis on recent economic research.
Working Paper 03-104: "The Effect of Professional Sports on the Earnings of Individuals: Evidence from Microeconomic Data" by Dennis Coates and Brad R. Humphreys.

Abstract: This paper explores the impact of professional sports teams and stadiums on the wages of individuals employed in several narrowly defined occupational groups in cities in the United States. The occupational groups examined are among those that proponents of public funding of professional sports claim will benefit economically from these stadiums. Our analysis uses data from the March Supplement to the Current Population Survey (CPS) for the period 1977 to 1998 as well as sports variables previously utilized by Coates and Humphreys (1999), (2001). Previous research focused on aggregate measures of income whereas here the focus is on the wages of individual workers. The results of the study confirm conclusions of earlier research that the overall sports environment is frequently statistically significant as a determinant of earnings and that the predicted mean impact of sports on wages in a sample of individuals employed in occupations closely related to professional sports is an annual average decrease in real earnings of $47.95. The results also show that the effects of the sports environment on wages differ across job-types. Workers in retail occupations earn more on average each year due to the presence of professional sports while workers in other peripherally related occupations like food services and hotels earn less.
Working Paper 03-105: "Voting on Stadium and Arena Subsidies" by Dennis Coates and Brad R. Humphreys.

Abstract: We analyze voting on subsidies for professional sports facilities in Harris County (Houston), Texas and Brown County (Green Bay), Wisconsin to learn more about voter preferences for these subsidies. The results differ somewhat between the two jurisdictions, as do the nature of the supports being proposed and the communities. One consistent result is that voting precincts that have a relatively high degree of poverty tend to oppose subsidies for professional sports. Another consistent result is that voters in close proximity to existing facilities are more likely to favor subsidies than are voters living farther from the facilities. In Harris County, the results consistently indicate that those over 65 years of age, whites, and those with Bachelors degrees statistically significantly oppose subsidies while those with higher incomes and blacks favor the subsidies. Different values of consumption benefits, stemming from differences in preferences, may explain these voting patterns.
Working Paper 03-106: "Agency Behavior in a Nonprofit Setting: Effects of the 1984 Supreme Court NCAA Decision " by Kathleen A. Carroll and Brad R. Humphreys.

Abstract: The NCAA is commonly viewed as a cartel. We model the cartel relationship between the member teams and the NCAA central organization as a principal-agent relationship. Our model predicts imperfect agency behavior on the part of the NCAA with corresponding overregulation relative to the level preferred by the member teams. We empirically test the model by examining the impact of the 1984 Supreme Court decision that reassigned the telecast rights for intercollegiate football from the NCAA to the individual member teams. Our empirical estimates of telecasts, attendance, and competitive balance support the prediction of imperfect agency behavior by the NCAA.
Working Paper 03-107: "Literacy and Mobility in Rural versus Urban Victorian England: Evidence from linked marriage register and census records for Birmingham and Norfolk, 1851 and 1881" by David Mitch.

Abstract: This paper reports procedures and results obtained from linking marriage registers with the 1851 and 1881 censuses for Birmingham, a major industrial center, and rural areas in Norfolk. The results underscore regional contrasts in mobility processes. Those starting out in Birmingham from unskilled origins whether parental or initial occupation, had quite high probabilities of experiencing upward occupational mobility. Probabilities for those of unskilled origin were considerably lower in rural Norfolk; but for those of higher origins mobility rates could at least equal if not exceed those in Birmingham. More strikingly, literacy offered considerably greater prospects for advancement for those in rural Norfolk than industrial Birmingham. Basic education could matter more to the aspiring farm bailiff or rural shopkeeper than for the nail-maker or gunsmith. The career impact of literacy over and above impact on initial occupation at marriage was especially sizable for agricultural Norfolk in the earlier time period. The results suggest differences in the migration patterns in the two areas with overall rates of migration being higher in Norfolk, but migration rates for the upwardly occupationally mobile being greater in Birmingham. There was no clear connection between literacy and geographic mobility. Thus, the results here do indicate a positive association between industrialization and occupational mobility. But they also underscore that mobility did occur in agricultural areas and that education could play at least as great a role in facilitating mobility in agricultural as in industrial areas.
Working Paper 03-108: "Accounting for Changing Inequality in Costa Rica, 1980-1999" by T. H. Gindling.

Abstract: After declining from the mid-1970s to the mid-1980s, earnings inequality in Costa Rica stabilized from 1987 to 1992 and then increased from 1992 to 1999. In this paper we use recently-developed techniques to measure the extent to which these changes in earnings inequality were the result of changes associated with the distributions (or .quantities.) of personal and work place characteristics of workers, and the earnings differences (or .prices.) associated with those characteristics. We present evidence that the most important cause of the fall in inequality prior to 1987 was a decline in returns to education, which in turn was caused by an increase in the supply of more-educated workers. We find that the most important causes of rising inequality in the 1990s were the end of this decline in returns to education and increases in the variance of hours worked among workers. Inequality in hours worked increased because of an increase in the proportion of workers working a non-standard work week (part-time or over-time)
Working Paper 03-109: "LA DESIGUALDAD EN AMÉRICA CENTRAL DURANTE LOS AÑOS NOVENTA" by T. H. Gindling and Juan Diego Trejos.

Abstract: Este trabajo pretende examinar dos preguntas: ¿cómo y por qué cambió la distribución de los ingresos en los países de América Central en los años noventa?, y, ¿por qué están los ingresos distribuido en una manera más equitativa en Costa Rica en comparación a los otros países de la región?. Para buscar respuestas a estas preguntas, se usa una técnica, basada en la estimación de ecuaciones de remuneración, que mide la magnitud de la desigualdad debido a diferentes características personales y del puesto de trabajo. La dirección de los cambios en la desigualdad del ingreso en los países Centroamericanos en los años noventa no es clara. Solamente Costa Rica presenta un deterioro claro en la distribución del ingreso. En los otros países, los resultados dependen de la medida de la desigualdad y del preceptor que se utilice. Pero bajo de estos cambios brutos, se encuentran fenómenos comunes en todos los países en los mercados de trabajo. El aumento en la dispersión de las jornadas de trabajo, es el fenómeno que se identifica con el mayor impacto negativo sobre equidad. Se identifican dos causas importantes de los diferentes niveles de desigualdad entre Costa Rica y el resto de los países de América Central. Primero, la educación está más igualitariamente distribuida en Costa Rica que en el resto de la región. Segundo, las diferencias salariales entre las zonas urbanas y rurales son más bajas en Costa Rica. Estos resultados implican que las políticas Costarricenses de la universalización de la educación primaria y de proveer aún a las comunidades rurales más aisladas de infraestructura económica y social son también causas importantes de las diferencias n la desigualdad entre Costa Rica y el resto de Centroamérica.

DEPARTMENT OF ECONOMICS • University of Maryland, Baltimore County
3rd floor Public Policy Building, Room 338
1000 Hilltop Circle • Baltimore Maryland 21250
phone: 410-455-2160 • email: Mrs. Kelly Hodges <khodges@umbc.edu>