Nova SBE Working Papers

Asset liquidity and the welfare costs of business cycles

Author: Pedro Brinca, João Duarte, Ana Melissa Ferreira, Valter Nóbrega
Date: October 2024
Number of pages: 33

In this paper, we revisit the question of what the welfare costs of business cycles are with new insights. The seminal paper by Lucas (1987) found welfare costs to be negligible at around 1%, but subsequent literature focused on finding mechanisms that could rationalize larger welfare costs. Our study builds on recent research that incorporates incomplete markets, adjustment costs, and marginal propensities to consume to show that welfare costs can be substantial. Our calculations indicate that eliminating business cycle fluctuations would result in a 1.25% increase in welfare, as measured in consumption equivalents. Furthermore, using a 2-asset HANK model, we find a welfare cost of 2.6%. This result arises from considering portfolio adjustment costs, which generate a distribution of marginal propensities to consume along the income dimension that is empirically plausible and produces a share of (rich and poor) hand-to-mouth households that is consistent with recent findings. In periods of recession, these values rise to 11.1%. These results are particularly driven by effects from the price rigidity.

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Does Financial Education Impact School Attainment? Experimental Evidence from Brazil

Author: Daniele Chiavenato, Ricardo A. Madeira, Vitor Vacaro
Date: 2024
Number of pages: 60

Can an applied mathematics curriculum enhance student intrinsic motivation and improve math achievement? We tackle this question through a randomized control trial of a program that integrates financial education into the mathematics curriculum in Brazil. Spanning 190 public schools and over 15,000 students, our study reveals that the program significantly boosts students’ interest in mathematics and enhances financial literacy and math performance, particularly among students from poorer socioeconomic backgrounds. Initially, the program strengthens these students’ internal locus of control and broad interest in mathematics during the first year. By the second year’s conclusion, it positively impacts their financial literacy, math proficiency, and specific socio-emotional skills crucial for the labor market. However, we do not observe significant changes in self-reported financial behaviors or attitudes as measured by a financial autonomy index.

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Effects of individual incentive reforms in the public sector: The case of teachers

Author: Pedro S. Martins, João R. Ferreira
Date: 2024
Number of pages: 53

Can incentives deliver value in the public sector, despite major principal-agent challenges? We evaluate a political reform that introduced individual teacher performancerelated pay and tournaments in public schools in Portugal. We find that the focus on individual performance decreased student achievement, as measured in national exams, and increased grade inflation. The results follow from a difference-in-differences analysis of matched student-school panels and two complementary control groups: public schools in regions that were exposed to lighter reforms; and private schools, whose teachers had their incentives unchanged. Students in public schools with a higher proportion of teachers exposed to the tournament also perform worse. Overall, our results highlight the potential social costs from disruption of cooperation amongst public sector workers due to competition for promotions.

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Money for nothing and stigma for free? The effect of positive discriminatory policies on education gaps

Author: José Gabriel Mesquisa, Luís Catela Nunes
Date: November 2024
Number of pages: 55

This paper analyzes a compensatory education program in Portugal whose aim is to provide equal educational opportunities for children from lower socioeconomic status (SES) families by ensuring additional school resources for deprived areas. Using two administrative databases covering virtually all public schools in Portugal, we present a comprehensive evaluation of such a program addressing an important effect that has been overlooked so far in the literature: a negative stigma effect, wherein students from higher SES families become less likely to enroll in treated schools. Our staggered difference-in-differences estimates show that: 1) the Student-to-Teacher ratio decreased significantly in treated schools as a result of their entry into the program, corresponding to an average drop of 9% relative to the pre-treatment average value; 2) the proportion of students whose mothers concluded upper secondary school entering treated schools declined substantially, a decrease of around 14% of the average pre-treatment value; and 3) no effects were observed in blind-marked national exam scores in the 4th-, 6th-, and 9th-grade for students coming from lower SES families, while some positive effects were found for non-blind sources of evaluation, particularly in schools where the change in additional resources was more pronounced. Our results emphasize the need to account for unanticipated risks of further aggravating segregation across schools when implementing publicly announced programs, in particular when they lead to discontinuities in terms of school eligibility.

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Public debt, iMPCs & fiscal policy transmission

Author: Stefano Grancini
Date: 2024
Number of pages: 43

In this paper, I examine the relationship between public debt and the effectiveness of fiscal policy, presenting evidence of an inverse relationship between government debt and fiscal multipliers. To explain the results, I develop and calibrate a HANK model tailored to the U.S. economy. The model reveals that higher public debt diminishes fiscal multipliers by making households less constrained; with greater debt serving as a liquidity self-insurance tool, agents exhibit a weaker labor response to fiscal shocks. Theoretically, I show that the level of government debt influences fiscal multipliers through its impact on intertemporal marginal propensities to consume (iMPCs). The primary factor driving changes in iMPCs is the heterogeneous response of agents to the fiscal shock across the aggregate wealth distribution. By holding more liquidity, households can better self-insure against potential future shocks, thereby affecting the overall effectiveness of fiscal policy.

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The heterogeneous effects of teacher turnover on student achievement: Evidence from a centralized teacher allocation system

Author: Sofia Gomes, Luís Catela Nunes, Pedro Freitas
Date: 2024
Number of pages: 48

This paper contributes to the literature on the effect of teacher turnover on student achievement. We study an educational system characterized by a centralized teacher allocation model and estimate the causal effects of teacher turnover on students’ exam scores. A small but statistically significant negative effect is found, which is mainly attributed to organizational disruption at the school level and seems to persist for up to two years. We find heterogeneous effects, with students from lower socioeconomic backgrounds and with lower previous
achievement being more negatively affected. We conclude that students in lower-achieving and socially disadvantaged schools are more exposed to teacher turnover, and this turnover penalizes these students more. We also find that it is the turnover among short-term contract
teachers that drives the negative effects.

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Wage cyclicality and labour market institutions

Author: João Pereira, Raul Ramos, Pedro S, Martins
Date: 2024
Number of pages: 67

Do labour institutions influence how wages respond to the business cycle? Such responsiveness can then shape several economic outcomes, including unemployment. In this paper, we examine the role of two key labour market institutions – collective bargaining and temporary contracts – upon wage cyclicality. Our evidence is drawn from rich, 2002-2020 matched data from Portugal. We find that workers not covered by collective agreements exhibit much higher wage cyclicality, especially new hires, compared to covered workers. In contrast, workers under temporary contracts do not exhibit sizable differences in cyclicality compared to counterparts under permanent (open-ended) contracts. Our findings highlight a novel angle through which labour institutions influence the labour market and the economy.

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What is (behind) the gender gap in sickness benefits? Evidence from administrative data

Author: Judite Gonçalves, João Rocha-Gomes, Mário Amorim-Lopes, Pedro S. Martins
Date: August 2024
Number of pages: 29

Women appear to take sick leave at a higher rate and for longer periods than men. However, the reasons for these differences are poorly understood. This study starts by outlining several channels (biological, psychological, socio-economic, and occupational) that may drive this gender gap. We then analyse rich individual longitudinal administrative data on employment and sickness benefits. We consider the case of Portugal, where sickness benefits are relatively generous, in contrast to other potentially related social support (such as childcare). We find that women’s adjusted monthly odds of receiving sickness benefits are 1.66 times those of men. This ratio falls to 1.37 when considering only hospitalisation-initiated sickness benefits, which may be driven exclusively by health factors. Overall, our results suggest that biological factors, as well as work-related hazards and stressors, play a large role in the gender gap in sickness benefits; yet behavioural and socioeconomic factors are non-negligible. For example, more women may use sickness benefits to accommodate caregiving responsibilities, and more men may forgo statutory sick leave to provide for their family. Our findings underscore the importance of more evidence for the enhancement of health and equity at work. Improved social and workplace policies to mitigate the double burden of work and family responsibilities, laying mostly on (poorer) women, may be needed, also to increase fair use of sickness benefits.

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What matters for the decision to study abroad? A lab-in-the-field experiment in Cape Verde

Author: Cátia Batista, David M. Costa, Pedro Freitas, Gonçalo Lima, Ana V. Reis
Date: June 2024
Number of pages: 35

Study abroad migration is the fastest growing international migration flow. However, the college completion rates of students from low-income countries are often modest in OECD countries, raising the hypothesis that these migrants are poorly informed about the costs and benefits of their decision. Our work tests this hypothesis by running a lab-in-the-field experiment where graduating high school students in Cape Verde are faced with incentivized decisions to apply for college studies abroad. Our results show that potential migrants react strongly to information about the availability of financial support and about college completion rates. Since subjects’ prior beliefs on availability of financial support are overestimated, it is likely that study migrants need to shift their time from study to work after uninformed migration, which likely harms their scholar performance. Policies that inform potential migrants of actual study funding possibilities should decrease study migration flows but are likely to improve successful graduation.

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