Firm Heterogeneity and the Aggregate Labour Share

Using a static model of firm behaviour with imperfect competition on the product and labour markets, we quantify the effect of firm heterogeneity in total factor productivity, product and labour market power, wages and output prices on the aggregate labour share. In particular, we suggest a new decomposition of the aggregate labour share in terms of the first moments of the joint distribution of these variables across firms, providing a bridge between the micro and the macro approach to functional distribution. We provide an application of our method to the UK manufacturing sector, using firm-level data for the period 1998-2014. The analysis confirms that heterogeneity matters: in an economy populated only by representative firms, the labour share would be 10 percentage points lower. However, and contrary to a common narrative focussing on increasing disparities between firms, the observed decline in the aggregate labour share over the period is driven entirely by the decline in the labour share of the representative firm, mostly due to an increasing disconnect between average productivity and real wages. Changes in the dispersion of firm-level variables have contributed to slightly contain this decline

Firm heterogeneity and the aggregate labour share

We propose a model-based decomposition method for the aggregate labour share in terms of the first moments of the joint distribution of total factor productivity, market power, wages and prices, and apply it to UK manufacturing using firm-level data for 1998?2014. Contrary to a narrative focussing on increasing disparities between firms, the observed decline in the aggregate labour share over the period is driven entirely by the decline in the labour share of the representative firm, mostly due to an increasing disconnect between average productivity and real wages. Changes in the dispersion of firm-level variables have contributed to slightly contain this decline

The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion

In this paper we provide a general characterization of diffusion processes, allowing us to analyze both risk-sharing and contagion effects at the same time. We illustrate the relevance of our theory with reference to the subprime mortgage crisis and more in general to the processes of securitization and interbank linkages. We show that interdependencies in real and financial assets are beneficial from a social point of view when the economic environment is favorable and detrimental when the economic environment deteriorates. In the latter case, private incentives are such that too many linkages are formed, with respect to what is socially desirable. The risk of contagion increases the volatility of the outcome and thus reduces the ability of the financial networks to provide risk-sharing. Our analysis suggests that a likely major explanation of the subprime mortgage crisis is the process of securitization itself, in addition to the absence of transparency about the characteristics of the underlying assets that the multiple layers of financial intermediation fostered, as commonly claimed. This may call for a different emphasis on the role of public intervention. While a goal to stabilize the economy in good times should be to disrupt the channels that bring contagion, that is a positive correlation in the returns, in a period of worsening economic conditions our analysis suggests regulatory intervention aimed at disconnecting the economy at crucial nodes. Moreover, we show that policy interventions should be aimed at rescuing institutions, but not their managers. Diminishing the cost of default actually increases the inefficiency due to the divergence between the social and the individual optimum

Developing an integrated microsimulation model for the impact of fiscal policies on child health in Europe: the example of childhood obesity in Italy.

Background We developed an integrated model called Microsimulation for Income and Child Health (MICH) that provides a tool for analysing the prospective effects of fiscal policies on childhood health in European countries. The aim of this first MICH study is to evaluate the impact of alternative fiscal policies on childhood overweight and obesity in Italy. Methods MICH model is composed of three integrated modules. Firstly, module 1 (M1) simulates the effects of fiscal policies on disposable household income using the tax-benefit microsimulation program EUROMOD fed with the Italian EU-SILC 2010 data. Secondly, module 2 (M2) exploits data provided by the Italian birth cohort called Nascita e Infanzia: gli Effetti dell'Ambiente (NINFEA), translated as Birth and Childhood: the Effects of the Environment study, and runs a series of concatenated regressions in order to estimate the prospective effects of income on child body mass index (BMI) at different ages. Finally, module 3 (M3) uses dynamic microsimulation techniques that combine the population structure and incomes obtained by M1, with regression model specifications and estimated effect sizes provided by M2, projecting BMI distributions according to the simulated policy scenarios. Results Both universal benefits, such as universal basic income (BI), and targeted interventions, such as child benefit (CB) for poorer households, have a significant effect on childhood overweight, with a prevalence ratio (PR) in 10-year-old children-in comparison with the baseline fiscal system-of 0.88 (95%CI 0.82-0.93) and 0.89 (95%CI 0.83-0.94), respectively. The impact of the fiscal reforms was even larger for child obesity, reaching a PR of 0.67 (95%CI 0·50-0.83) for the simulated BI and 0.64 (95%CI 0.44-0.84) for CB at the same age. While both types of policies show similar effects, the estimated costs for a 1% prevalence reduction in overweight and obesity with respect to the baseline scenario is much lower with a more focalised benefit policy than with universal ones. Conclusions Our results show that fiscal policies can have a strong impact on childhood health conditions. Focalised interventions that increase family income, especially in the most vulnerable populations, can help to prevent child overweight and obesity. Robust microsimulation models to forecast the effects of fiscal policies on health should be considered as one of the instruments to reach the Health in All Policies (HiAP) goals

Bayesian estimation of agent-based models

We consider Bayesian inference techniques for agent-based (AB) models, as an alternative to simulated minimum distance (SMD). Three computationally heavy steps are involved: (i) simulating the model, (ii) estimating the likelihood and (iii) sampling from the posterior distribution of the parameters. Computational complexity of AB models implies that efficient techniques have to be used with respect to points (ii) and (iii), possibly involving approximations. We first discuss non-parametric (kernel density) estimation of the likelihood, coupled with Markov chain Monte Carlo sampling schemes. We then turn to parametric approximations of the likelihood, which can be derived by observing the distribution of the simulation outcomes around the statistical equilibria, or by assuming a specific form for the distribution of external deviations in the data. Finally, we introduce Approximate Bayesian Computation techniques for likelihood-free estimation. These allow embedding SMD methods in a Bayesian framework, and are particularly suited when robust estimation is needed. These techniques are first tested in a simple price discovery model with one parameter, and then employed to estimate the behavioural macroeconomic model of De Grauwe (2012), with nine unknown parameters

The Future of Agent-Based Modeling

In this paper, I elaborate on the role of agent-based (AB) modeling for macroeconomic research. My main tenet is that the full potential of the AB approach has not been realized yet. This potential lies in the modular nature of the models, which is bought by abandoning the straitjacket of rational expectations and embracing an evolutionary perspective. I envisage the foundation of a Modular Macroeconomic Science, where new models with heterogeneous interacting agents, endowed with partial information and limited computational ability, can be created by recombining and extending existing models in a unified computational framework

On the Virtues of the Shame Lane

In July 2003 a new Road Code was approved by the Italian parliament. Among other changes, the law states that on three-lane motorways the right lane should not be reserved anymore to slow vehicles. The model developed in this paper casts doubts on the wisdom of such a change, suggesting that reserving a separate lane for slow vehicles is generally better, in terms of number of accidents and slow-downs, than treating all vehicles the same way. In addition, a value for the speed threshold below which vehicles are considered slow can be found, for which the old rule also performs better in terms of average speed. This conclusion has applications beyond the Italian case. Moreover, it is shown to be extremely robust to refinements of the main assumptions concerning driving attitudes and the stochastic arrival of accidents.